State Diamond Trade Annual Report 2102, Mineral Resources Budgetary Review & Recommendations Report adoption

Meeting report

Ms F Bikani (ANC) chaired the meeting until the Chairperson, who was attending another meeting, could arrive.

State Diamond Trader (SDT) 2011/12 Annual Report briefing
Ms Futhi Zikalala, Chief Executive Officer, State Diamond Trader, tabled the Annual Report 2011/12, and apologised for the absence of the Chairperson, who had already been summoned to another Board meeting by the time this Committee invited the presentation on the Report.

The State Diamond Trader (SDT) aimed to be a leading catalyst for the transformation of a sustainable diamond beneficiation industry. She briefly set out its strategic goals, and noted that a comparison of performance showed how far the SDT had come in the last three years, and the fact that the entity had been sustained. The diamond market was, at the moment, very “soft”, due in part to factors like the poor economy of the United States and Eurozone. SDT had made 72 purchases in 2011-2012, with 67 in 2010-2011 and 29 in 2009-2010, respectively. SDT had sales of R433.05 million in 2011-2012 and sold to 58 clients. In this year the major purchasers were De Beers, who had purchased R295.07 million, and Trans Hex, with R46.32 million.

The preferred rough diamonds for beneficiation were rough diamonds bigger than 0.67 carats, in a full colour range, but excluding dark brown, and this was producing polished diamonds that had at least SI1 quality. The SDT met with clients and saw what their views were. Only 6% of carats from SDT purchases of rough diamonds were preferred for beneficiation. This translated to a 51% value of rough diamonds from SDT purchases that were preferred for beneficiation. Of the 94% of carats were not preferred, this translated to 49% of the value not being preferred.

The SDT had 58 clients for the 2011-2012 period, and 2010-2011 it had 60. For 2011-2012, the SDT’s clients with the largest volume of purchases were from large and medium sized (L/M) beneficiators who had established factories and employed more than ten people. The value of the purchases was R339.84 million. The second largest group were niche purchases, which included other beneficiators and clients from non-historically disadvantaged South African (HDSA) backgrounds, who employed less than ten  people, and their purchases amounted to R80.88 million. The Mandate sector were clients from HDSA backgrounds with more than 50% HDSA ownership, who employed less than five people. The last group comprised public, private partnerships. This group was assisted by the provincial governments.

Even though there were overall lower sales, the value of sales to mandate clients increased year on year by 65%, from R6.4 million to R10.6 million. The value of sales to L/M clients fell by 39%, from R560 million to R340 million. The Mandate clients were allowed to “cherry pick” those diamonds suitable for their manufacturing and marketing capabilities. These were the more valuable, high quality and larger rough diamonds preferred by all beneficiators.

The SDT was able to prove itself as a practicable commercial operation during a very volatile period. Without public funding, the SDT had continued to ensure its sustainability through operations. There had been international interest in SDT. Even though SDT was young, it had managed to train and employ four people in diamond valuation and sorting this year. All of SDT trading practices were controlled by relevant internal policies and procedures that had been externally audited.

The SDT had received unqualified and clean audit reports for five consecutive years, since it had been founded. The SDT had inspected over 90% of the diamonds produced in the country.  The SDT’s ability to purchase the 10% envisaged had been affected by global economic uncertainty. The SDT had to ensure that its stock did not sit idly in the safes and had in some cases reduced the pace to make sure the operation made sense.

Discussion
Mr C Gololo (ANC) said that there was a State Diamond Trader in Botswana that had recently opened. He wondered if there would be any working relationship with that entity, and what the future plans were for South Africa, given that the diamond industry had moved to Botswana because those mines were producing more. The largest country that beneficiated diamonds was India, and for this reason he wondered if SDT would put South Africa in that part of beneficiation of diamonds.

Ms Zikalala answered that the Okavanga Diamond Company had opened, but she was not so sure whether it would be a competitor with SDT, because it was in another country. SDT was hoping to have a relationship with the Botswana counterparts, because the founding legislation allowed SDT to purchase outside of South Africa. It had held informal discussions and would be following up with them. The SDT had also found large companies in Botswana, that were also operating in Johannesburg. The SDT still believed that all could work together and that it could obtain diamonds from other sources, depending on negotiations. She agreed that it would be ideal for SDT to grow the industry, as India had done, but this was dependent on other factors like skill, availability of capital or South Africans setting up more operations. The SDT wanted diamonds to be cut and polished, but also wanted them to be manufactured as jewellery in South Africa. The SDT wanted all diamond beneficiation to be in the country. However this could not be done by SDT alone, and it needed the help of government. The SDT hoped to get to the ideal of India comparatively, but the Committee needed to keep in mind that there were one billion people living in India.

Ms F Bikani (ANC) noted that some companies were employing less than ten people, and asked if these figures related to places where the diamonds originated, or were employment numbers relating to the companies to whom SDT sold. She wondered what changes would be made to increase employment figures, since this seemed to be a very small employment base.

Ms Mathebe asked how SDT managed to sustain itself through its own operations, and asked also what strategy it would put in place within the country to improve the status quo?

Mr J Lorimer (DA) asked who the PPP clients were. He also wanted to know what percentage of SDT sales went to the top three clients. He asked if the diamonds were being cut and polished locally or were being sent overseas.

Mr H Schmidt (DA) noted that the SDT had 58 clients in 2011-2012, and cutting and polishing had declined. He asked how many cutters there were, in total, in the country, noting that SDT was selling to 59 clients. He was concerned about the viability of the cut and polishing industry, especially if there were only 58 clients. He asked for the numbers of clients in each of the large and medium sized beneficiators, mandate, niche and PPP client groups.

Mr Schmidt asked for further explanation on how the SDT would allow a certain target market one way of operation, although the other target markets, with whom the first competed, were not allowed to “cherry-pick”. He understood the rationale but questioned how this sat with ideas of unfair competition.

Ms Zikalala addressed the questions, firstly, around the clients. The L/M clients were those to whom SDT sold. The numbers of employees were employees of those clients, and not numbers for companies producing the diamonds.

She noted that there was one PPP in the Eastern Cape, based in East London, and it was training people. Another company was being set up and supported in Northern Cape, and the province would benefit from this. 

Mr Lorimer asked if there were two PPPs.

Ms Zikalala said that the SDT only had one PPP as a client. The other proposed PPP in the Northern Cape was still in the process of being set up and needed to be inspected.

Mr Lorimer asked what the PPP was doing in the Eastern Cape.

Ms Zikalala said there were 4% margins of purchases that this company was making within a trading cycle. The margins were really low. It all depended on how the market was performing. Polished diamonds of higher qualities were not moving as much as the lower qualities. The SDT factored in all the issues. In order to grow SDT and purchase from other countries, there would still be a requirement of State support. She said that, in the next three years, there would be an increase in the improvement of manufacturing locally, as long as the country implemented what was now in the pipeline. There would not be a vast increase in employment, but rather in entrepreneurs. The SDT wanted to see new entrants who were South African and historically disadvantaged South Africans becoming entrepreneurs in this sector, setting up and running their own businesses.

Ms Bikani said that she was referring to SDT, and asked if it had a strategy in place to implement projects to ensure increased manufacturing in the country.

Ms Zikalala said that there were programmes on the ground that mentored and coached, particularly women. The SDT wanted to take on more clients, and was looking into that.

Ms Bikani asked what percentage of the budget was needed to implement projects.

Ms Zikalala answered that the SDT did not use its own budget on these projects, because they did not cost the SDT anything; instead it was working with others such as those who could provide funding for the coaching programmes. SDT spent money assisting in marketing.

Ms Zikalala then answered the question on unfair competition and cherry picking, by saying that the SDT would kill small business if it sold small goods. The question of whether or not the policy was fair was a debate for another day. Some business would grow and have global networks to grow further. It was a provincial issue.

Mr Lorimer wanted the figures and names of the top three clients, and asked what the trading value was in the year under review.

Ms Zikalala then spoke to the issue of what percentage of sales went to the top three clients, by saying that she was not sure whether SDT could really identify “top three”. The L/M clients bought more than others from time to time, but the sales were not always consistent. Two companies were not presently buying from the SDT, even though they had done so at the beginning of the year. The clients were either downsizing or were not telling the SDT why they were not buying. The SDT had been selling, on and off, to three main clients but those clients did not process everything they bought from the SDT, and they ended up exporting primarily to India. There were about twelve L/M clients that the SDT sold to on an on-and-off basis. She could provide information on how many carats were sold to the clients.

Mr Lorimer asked for this information to be sent to the Committee.

Mr H Schmidt (DA) was concerned because there was a 30% reduction in production overall, but there was a 50% reduction in purchasing. Operations therefore appeared to be reduced by 50% because SDT had not kept up with the 30% reduction. He wanted an explanation of that issue.

Mr Schmidt noted that the 6% preferred indicated the extent of reasonably and commercially expected beneficiation. If only 6% was preferred, then he wondered if this meant that effectively the SDT was limiting beneficiation to only 6% of total production of all diamonds in the country.

Ms Zikalala said that there was a 50% reduction from last financial year, but it reflected what was going on in the industry worldwide. The SDT was driven by turnover, for both buying and selling, so when it bought less then it would not be able to reach the 10% targets. The SDT tried to buy as much as it could, but when business was tough the larger clients did not do as much when compared to the smaller clients. The SDT always faced a risk and wanted to keep mobile at all times. The 6% preferred translated to 51%, and what was preferred in this country was more in terms of cutting and polishing. 94% value got exported, mostly to India. It was a challenge, but it was the wisdom of Committee and Parliament to not buy commercial goods.

Mr Schmidt said that De Beers had previously given a presentation in which it had said it had more offerings in the local market for cutters and polishers in South Africa. SDT was putting a limit of 6% and he was concerned it was not 100% of the value.

Ms Zikalala said she understood his concerns, but the Committee, at that time, made a decision that these figures were acceptable, and the decision was implemented. Even when De Beers brought back higher value goods, it sold to certain people. When the market became depressed, then these people were themselves in a no better position. De Beers only managed to attract one new client in this country in this cycle, and that was still a major issue. SDT had 58 clients, but this did not include site holders and people holding licenses. The figure must be compared to the 102 that the SDT had in the previous financial year. The Chairperson asked if there were any more questions.

Mr Schmidt asked if the De Beer’s agreement with SDT would be extended.

Ms Zikalala said it was extended but that extension would be coming to an end at the end of the month. Discussions were in place and she was not at liberty to say if there would or would not be an extension.

Mr Schmidt asked how many clients SDT had, overall.

Ms Zikalala said that there were twelve in the L/M sector, and the other numbers were higher, around 30 for Niche and Mandate segments, but she did not have the exact figures with her.

The Chairperson asked for these figures to be supplied in writing to the Committee.

Mr M Sonto (ANC) congratulated the SDT on the Audit Report. However, he wanted to know why people were dropping out of the training programmes and asked how critical the position of organisation secretary was. He pointed out that in the mining houses, strategic positions were held by previously-advantaged individuals, and he wondered how difficult it would be to train others to take up critical positions in the mine industry and SDT.

Ms Zikalala said that people had dropped out of training, because they could become more employable elsewhere or had higher pay. The SDT knew some would drop out, and had come to terms with this. It cost about R500 000 to train four to five people in a group. Training was ongoing, and the SDT was hoping to capture some of those who finished the training, and employ them permanently. In regards to the Organisation Secretary issue, she noted that SDT was still trying to stabilise the entity and this was therefore not yet regarded as a permanent position yet. The SDT had intentions to enter into another set of employment contracts, on a permanent basis, in the following year. She confirmed that it was not difficult to train people to manage institutions, provided that there was a commitment to finding and then employing people. There were many HDSAs. However, SDT was attempting to attract the best employees.

Draft Budgetary Review and Recommendations Report (BRRR) on Mineral Resources: Consideration and adoption
The Chairperson asked that Members concentrate on the sections dealing with the Committee’s observations, the conclusion and Committee’s recommendations.

There were four observations:
-the total number of planned targets of 42 was not met,
-employees received overtime compensation in excess of 30%,
-the audit committee was not meeting regularly as it was supposed to
-the Department of Mineral Resources (DMR or the Department) was under-funded and could not perform all tasks.

The members did not have any comments on these observations.

In relation to the conclusion, Mr Schmidt said that the Auditor-General would note whether certain percentages had not been spent. He asked what percentage of underspending the figure of R102.7 million represented.

The Chairperson said that the National Treasury had said that 5% was the allowable margin for spending or under spending. The figure, at the DMR, represented 1%.

The Chairperson was not sure whether the Committee could get more precise figures from the Department for the 6 000 ownerless mines, which had been calculated as costing R30 billion to rehabilitate. The Auditor-General (AG) was not satisfied with this general figure. In addition, some of the owners might be able to be traced.

Ms Bikani pointed out that the DMR had said that some of the 6 000 mines could well be taken care of by the owners and that better predictions were needed.

 Mr Gololo said that the BRRR needed to give more clarity on how the DMR intended to come up with a clearer scorecard.

Mr Lorimer said that since some of the posts were not funded, perhaps the Committee should add a second point asking the National Treasury for more money to be allocated.

The Chairperson said that the National Treasury would not give more money if the Department could not fill the post with the money it already had available.

Mr Lorimer noted that the AG had recommended that quarterly reports be given by the Department, especially on its progress with personnel issues. He asked for confirmation that this was covered in other points.

The Chairperson said it was, but asked if the Committee should add timeframes.

Mr Lorimer agreed with said, commenting that the issue had been long outstanding.

Mr Schmidt said he was not a part of the discussion on the Codes, and asked how the new Codes would have a bearing on the recommendations.

The Chairperson said it dealt with the present scorecard. The Mining Charter would have to be aligned with the new Codes later.

Mr Schmidt said that the BRRR was for the 2011-2012 financial year, and essentially related to the performance in that year. He asked how it would impact on the current budget.

The Chairperson said that it did impact, to the extent that, for instance, the Department was expected to fill vacant and current posts. It was indeed reflecting on past performance, but the corrective steps on those should be taken in the current financial year with corrections.

Illegal mining issues: Member concerns
Mr D Lorimer (DA) said that he wanted to raise some concerns about illegal mining. He said that, in the last three weeks, along a 3 km road, primarily surface mining had been being done by hundreds of people near Soweto, and they were finding gold. They were able to realize between R250 and R370 a gram, so this was a big issue, and it was growing rapidly. He had attempted to get closer to see what was happening, but had been threatened by people with guns. The DMR had said that the police were involved and were working on the problem, but nothing had been done. This amounted to undermining the legislation, and he suggested that the Committee must urge the Department to monitor and address the problem more specifically. He also suggested that, since that surface mining was taking place on property owned by the municipality, it should not simply be closed down. Instead, the municipality and DMR should allow it to continue, but keep it regulated with a special license. It was a large and complex issue, with similar forms of mining also happening in other places. It was something that he felt should be addressed.

The Chairperson said that he recently went on a tour, and saw high prevalence of illegal mining activities, some of which were operating underground. He agreed that there would be a preponderance of people with weapons, and it would require the Special Forces in the Army to flush them out from underground. The Department said they could not deal with this because it was a criminal issue. The Committee could raise the need to change the legislation with the Department, but it would also be necessary that loopholes were not exploited to allow the trade to flourish. The question also had to be raised if the policy had capacity to deal with it.

Mr Schmidt said there was one problem that the owners of the property, whether individuals or state entities, were allowing the illegal miners to mine, which meant that the problem had actually increased.

Ms Bikani said that illegal coal mining was also a problem. A collective approach was needed, and the Committee needed to consider its role.

Mr Lorimer asked if there would not be an option to legalise and thus regulate small scale mining, rather than simply declaring it illegal. This was a growing concern, and it would inevitably lead to disputes on who could dig where, it was only a matter of time before turf wars started, and it must be remembered that people were armed. He believed that illegal underground mining could never be stopped.

The Chairperson said the owners of the land should be alerted to the situation, and they could lay complaints with police, leading to the matter reaching the task force. The Committee should raise this issue with the Department as well, who could send inspectors to the areas to identify the best cause of action to be taken.

Mr Lorimer said the Committee should ask the Department who owned the land.

The Chairperson agreed, and said he would forward the photos to the Department. He also thought the  Committee should revisit the 2009-2010 reports that were tabled in Parliament on illegal mining. He suggested that the Committee could also arrange for an oversight tour to illegal mining spots.

Ms Bikani hoped that Mr Lorimer would be a part of the oversight tour.

Mr Lorimer endorsed the Chairperson’s suggestion. He had been in contact with a community leader who had some disturbing complaints about official involvement in SAPS in some of the operations.

Committee Programme
The Chairperson said the Committee needed to adopt the programme. He was not going to go through it, but did want to speak about the study tour. He was meeting with the Chair of Chairs to resolve this matter. The whole Portfolio Committee could go, once every five years, on a study tour. In January 2011 the Committee went to Bolivia and Chile. There was substantial development in the mining industry, yet there was also the issue of funds. The Chairperson would ask the Chair of Chairs to take a final position on permission for the Committee to attend a tour.

Mr Lorimer said that if the Committee went to Australia, then it should be prepared to address also the question of the taxes this country had recently introduced, into matters to be studied.

The Chairperson said that the Foreign Missions were working on requests. Once the Committee received permission, it must address what it wanted to deal with.

The meeting was adjourned.