GDRC DIAMOND SECTOR UPDATE - IT'S NOT GOOD NEWS

C O N F I D E N T I A L SECTION 01 OF 02 KINSHASA 000125

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/31/2017
TAGS: EMIN ECON EINV ETRD CG
SUBJECT: GDRC DIAMOND SECTOR UPDATE - IT'S NOT GOOD NEWS

REF: A. 05 KINSHASA 731


B. 06 KINSHASA 440

Classified By: EconOff W. Brafman for reasons 1.4 b/d.


1. (SBU) Summary. The DRC's 2006 diamond export revenues will
likely be well below 2005 levels, largely due to a drop in
production by the diamond mining parastatal, MIBA. Not only
have production, export quantities, and export values
decreased compared with 2005 figures, but hoped-for export
revenues from the DRC's only diamond polishing factory have
also failed to materialize. The decrease in official
production may provoke a dispute among the GDRC, MIBA and a
private company over a diamond marketing contract set to
expire in July 2007. End summary.

Production and export - not a rosy picture
--------------


2. (U) The DRC's production through the end of November 2006
dropped by 12.35 percent against 2005 totals. The CEEC (the
DRC's diamond/gold evaluating authority) reports total
national production of nearly 26 million carats through
November 2006, against 29.6 million for the same period in

2005. Production of industrial diamonds decreased 13.9
percent over that period, while gem-quality production
dropped by less than one percent. (Note: The decrease is
largely attributable to MIBA, whose production has fallen off
by almost half in the last year, and which did not even
report any November 2006 production. End note.) According to
CEEC valuations, per carat value of exported diamonds
decreased overall by 23 percent, led by a 28.5 percent drop
in evaluated worth of industrial diamonds and a 19.9 percent
decrease in the value of gem-quality diamonds. (Note:
Rough-diamond prices did decrease globally in 2006. End note.)


3. (U) The quantity and value of exported diamonds also
decreased through November 2006, compared to the same period
in 2005. The exported quantities of both gem quality and
industrial diamonds dropped by the same twenty percent.
However, the reduction in the value of these exported diamond
differed significantly: gem quality diamond values were down
by twenty percent, while industrial diamond values were down
by 43 percent.

Problems with Emaxon too
--------------


5. (C) To add to problems in the DRC diamond sector, a
dispute may be brewing between the GDRC and Israeli
businessman Dan Gertler. The diamond marketing contract
between MIBA and Emaxon Finance International (Emaxon),a
member of the Dan Gertler International group of companies,
is scheduled to expire in July 2007, but Emaxon claims the
contract will extend for several more months. (Note: Per
Reftel A, the agreement was part of a controversial USD 15
million loan package to MIBA. End note.) Under the agreement,
Emaxon has the right to purchase 88 percent of MIBA's
production at ten percent below market rate, and MIBA must
produce a minimum, monthly quantity of approximately 455,000
carats.


6. (C) MIBA, however, has been producing well below its
contractual quota for the last few months. As a result,
according to Emaxon,the agreement will extend until MIBA
meets the set production quantity. A Ministry of Mines
counselor told EconOff that while it is true that MIBA has
been producing well below the contract's floor, the people
associated with Emaxon are "thieves" and will find any
pretext to prolong the contract. He also told EconOff Emaxon
has unfairly been paying MIBA far below market value for the
diamonds, even considering the contractual discount.


7. (C) Meanwhile, the production of another DGI entity,
Emaxon Polishing, is also low. Since its cutting and
polishing factory opened in Kananga, Western Kasai in 2005,
it has consistently reported processing only about 250 carats
per month. According to the CEEC, Emaxon produced 265
gem-quality polished diamonds with an estimated value of USD
60,000 in November 2006, the last month for which official
statistics are available. An Emaxon official told EconOff the
DGI Group is not ready to invest significant resources in
this project, but is instead focusing on its copper/cobalt
production. (Note: In 2005, Emaxon officials told EconOff
that the factory was not producing at capacity because it did
not have a license to purchase diamonds domestically (reftel
B). End note.)

KINSHASA 00000125 002 OF 002



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


8. (C) Until the proposed large-scale industrial projects
begin production, which is not expected to occur for several
years, the DRC's official diamond revenues are likely to
remain flat or even continue to decrease. What drives this
situation is both MIBA's decreasing production capacity and
the GDRC's inability or unwillingess to stem the flow of
diamonds outside of official sources. End comment.
MEECE