Showdown in South Africa

Needless to say, the GDV placed valuations of De Beers rough diamonds significantly higher than De Beers valuations, resulting in De Beers refusal to export the diamonds. The dispute boiled over this week when the GDV applied values 30 percent greater than De Beers for large diamonds (specials) being imported for the South African sight. This resulted in a delay of the sight which finally proceeded without sale of the specials to the South African sightholders.

South African diamond exports are governed by the Diamonds Act of 1986 which is under the purview of the Minister of Minerals and Energy, Dr. PM Maduna. Several weeks ago the De Beers/GDV valuation dispute was brought to Maduna who appointed a task team to look into the matter. Maduna issued his ruling May 5, 1999. The full text of the Maduna ruling is available in the news section at www.diamonds.net.

Maduna Report

Maduna made clear his view that the Diamonds Act needs to be reviewed in its entirety and that a report from the Commissions of Inquiry set up for this purpose in December of 1996 should be completed by this September. He also emphasized that the "only objective of section 59 (of the Act) is to stimulate our local cutting and tool-making industry by ensuring that they obtain a regular supply of unpolished diamonds." In his ruling Maduna says, "all section 59 agreements will be reviewed to insure that they only address the objective of that section and are not being used merely as a vehicle to avoid payment of export duty." It should be noted that De Beers currently exports their diamonds under a section 59 exemption. Maduna's statement clearly indicates that he does not intend to enable De Beers use of section 59 without clear evidence that it is being used to support the local cutting industry. This represents a major change in the status-quo.

Maduna's task team confirmed that De Beers is of the opinion that their Price Book should be used to etablish "fair market value" since the CSO sells their diamonds at Price Book prices and not at spot-market-prices. They also explained that it is the position of the GDV that "the CSO price list should only be used as a barometer and not as the official list for valuations by the GDV." In reviewing the relevant sections of the Act, "the task team came to the conclusion that neither interpretation is strictly in accordance with the letter and intent of the law."

Maduna goes on to state that the Diamond Act clearly describes the procedures to be used for the exporting of rough diamonds and to determine "fair-market-value" as defined by the Act. The exporter must specify the value of rough to be exported and declare that such value is to the best of their knowledge the fair market value of the diamonds. The GDV may retain the rough diamonds for no longer than 10 days to have it's value assessed in the event he disagrees with the value presented by the exporter. The assessment procedure specifies that the diamonds may be put out to tender by the GDV. If there is no written tender offer 15 percent greater than the exporters declared value then it shall be accepted as the fair market value. Should a tender offer be more than 15 percent higher than the exporters declared value, then it will be accepted as the fair market value.

"The task team therefore concluded that, while De Beers was wrong in insisting that the GDV should merely verify their system of determining "fair market value," the GDV and the Diamond Board also erred in delaying consignments of diamonds for longer than the period specified in the regulations (i.e. 10 days), while not following the prescribed process for having the value assessed."

Maduna's Ruling

Short term: In order to resolve the current impasse in the interest of all parties concerned, and to ensure that both commercial and statutory requirements are met, I have appealed to the Diamond Board, the GDV and De Beers that the following interim arrangements be adhered to:

(a) For the purpose of contracts between De Beers and its suppliers of Diamonds, the GDV will, as an audit function, verify and confirm that the value of diamonds has been assessed in accordance with the system as specified in such contracts.

(b) The GDV shall, only if he is not reasonably satisfied with the "fair market value" as declared by the exporter in terms of section 61(2) of the Act, retain and have the value of the relevant diamond(s) assessed. Such retention and assessment of value shall be done strictly in accordance with section 65 of the Act and the relevant regulations.

Medium term: In order to formally remove any uncertainty as to the manner in which the value of diamonds is to be assessed in terms of the Act, it is recommended that further regulations be prepared as provided for in section 76(b). Furthermore, all current section 59 agreements will be reviewed to ensure that they only address the objective of that section and are not being used merely as a vehicle to avoid payment of export duty.

Longer term: In order to realign diamond legislation with the Constitution and Government policy as well as to remove practical problems such as a lack of clarity and conflict of interest, the Diamonds Act will be reviewed in its entirety.

In conclusion, ladies and gentlemen, I wish to assure you that it is neither the intention nor will it be the result of my decision to harm the South African diamond industry. A healthy and prospering diamond industry should be as important to our country as it is to the shareholders of the companies directly involved in the industry. This, however, means that we as Government must ensure that the taxes, dues and fees are being paid by the industry as intended in the various acts.