Diamond Amendment Bill; Precious Metals Bill: briefings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
22 June 2005
DIAMOND AMENDMENT BILL; PRECIOUS METALS BILL: BRIEFINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Department briefing
Draft Diamond Amendment Bill
Diamonds Act, 1986
Draft Precious Metals Bill
Mining Rights Act, 1967

SUMMARY

The Committee was briefed on the Diamond Amendment Bill and the Precious Metals Bill by a delegation consisting of officials from the Department of Minerals and Energy, the SA Diamond Board and Mintek. Both Bills would have far-reaching consequences for the diamonds and precious metals sector. In essence, the Bills would force local producers of raw mineral resources to play a more direct role in the downstream beneficiation of those materials. The State would also play a more interventionist role to ensure greater access to raw materials for local companies and opening up the two sectors to foreign investment and direct participation.

Members applauded the move to greater local beneficiation, but raised concerns about the unintended consequences of the new legislation; the constant monitoring of increased beneficiation; socio-economic empowerment; international experience; the level of foreign involvement and whether mining companies would be forced into downstream activities.

MINUTES

Director-General’s introduction
Mr A Mngomezulu, Department Deputy Director-General: Mineral Policy and Investment Promotion, informed the Committee that South Africa was the world’s largest gold producer, with some 15% of global supply. It was the fourth largest supplier of rough diamonds, producing about 12% of the global total and produced some 70% of world platinum supply.

The country had a trainable workforce, but overall, negligible value addition to the above commodities occurred locally. The rationale for amending the existing legislation included improving access to raw materials; maximising the local value-addition industry; encouraging foreign direct investment; encouraging investments in trading and manufacturing; growing manufacturers of diamond cutting and servicing equipment and establishing SA as a major international diamond cutting centre and trading hub.

Diamond Amendment Bill briefing
Mr Louis Selekane (CEO: SA Diamond Board) said this Bill would establish the state-funded State Diamond Trader that would have the power to purchase a certain percentage of local diamond production and distribute this to local beneficiators. The Bill also established the state-funded SA Diamond and Precious Metals Regulator.

The Bill would make it compulsory to declare synthetic diamonds; would prohibit assistance to local buyers or sellers except at the state-owned Diamond Exchange and Export Centre and would align search and seizure provisions with the Constitution. In addition, the Bill would make provision for a consolidated diamond beneficiation licence that would be valid for five years. Furthermore, unpolished diamonds for export would be offered at the export centre with an export duty payable. Therefore, no exports of unpolished diamonds would be allowed from local trading houses. A distinction would also be made between economically cuttable and non-cuttable diamonds.

The Bill further provided that the Minister of Minerals and Energy had to determine the terms and conditions under which all producers had to offer unpolished diamonds to local beneficiators and would determine classes of economically cuttable diamonds. The Regulator would have the power to exempt non-cuttable diamonds from export duties. Finally, the Bill would provide guidelines for the implementation of broad-based socio-economic empowerment.

Precious Metals Bill briefing
Adv Martin Mononela, Chief Director: Mineral Policy and Administration (Department), informed the Committee that precious metals were currently governed by the Mining Rights Act, 1967. The rationale for the new Bill was to deregulate silver and the possession of and trading in minted bars as an investment product; restricting fabricators to semi-fabricated precious metals; deleting the requirement of a transport permit and having the Act administered through the SA Diamonds and Precious Metals Regulator.

The Bill would introduce a beneficiation licence for fabrication; prohibit fabricators from purchasing unwrought precious metals; provide for stolen precious metals to be returned to the original mine owner and would introduce an import permit. The Bill would provide that a permit was required for unwrought metals for scientific purposes or for holders of beneficiation or jewellers permits. The Regulator had to promote equitable access to and orderly beneficiation of precious metals and could take into account the requirements of the Mining Empowerment Charter.

The Bill would provide for a refining licence that was issued by the Regulator. It would be issued for ten years and would be renewable. Refiners would only be allowed to sell precious metals in semi-fabricated form to jewellers and beneficiation licence holders. The beneficiation licence would allow holders to buy semi-fabricated precious metals and to fabricate it into articles other than jewellery. It would be issued for ten years and would be renewable. The holder had to keep records in accordance with generally accepted accounting principles and would not be allowed to purchase unwrought precious metals.

The Bill provided that a copy of a licence, permit or certificate would be required to transport unwrought or semi-fabricated precious metals and that an import permit would be required to import precious metals. The powers of the police to inspect, search and seize have been updated and the penalties for serious offences were increased to R1 million or up to 20 years of imprisonment.

Discussion
Mr C Kekana (ANC) commented that the Bills appeared to be "very impressive", but he questioned how they would be implemented. He also asked how much beneficiation was currently done.

Mr H Schmidt (DA) commented that the unintended consequences of the new legislation would only later become apparent. He asked how the purchase of a certain percentage of rough diamonds by the state would be enforced and whether international experiences had been taken into account when the Bills were drafted. He also wanted more clarity on the type of determinations the Minister would make in terms of the Diamond Amendment Bill.

Mr E Lucas (IFP) asked what the effect would be on SA’s neighbours if the country became a major diamond cutting and polishing centre.

Mr C Callaghan (Mintek) pointed out that about 15% of SA’s annual diamond production was beneficiated locally. Mr Selekane said that in terms of Clause 77 of the Diamond Amendment Bill, the Minister would have the ability to set a baseline for which diamonds were cuttable and which were not. This would be done through regulations. The Minister would also monitor market demand and would establish the percentage to be bought from local producers based on demand and supply. The Minister would be able to constantly adjust the determinations based on the results of monitoring.

He added that international experience showed that SA could not afford six privately-owned diamond exchanges as was currently the case. It was too confusing and the exchanges had to be state-run to afford stakeholders the opportunity to be affiliated to it. In addition, SA had established a forum with African states to discuss issues relating to the diamond industry. Currently, SA was providing training and other services to the Democratic Republic of Congo (DRC) and Sierra Leone.

The implementation of the eventual Act would be based on the information currently held by the SA Diamond Board. This information was highly accurate and provided a "control" point for implementation. The Board was currently discussing this issue with a number of stakeholders.

Mr Mngomezulu added that the Department expected a big increase in international interest in cutting and polishing diamonds in SA in the new dispensation. Some interest had already been shown, but the Department intended publicising the benefits of the new dispensation globally to attract as many newcomers as possible.

Mr C Molefe (ANC) asked whether the Department’s drive to attract foreign investors would not hamper socio-economic empowerment in the diamond industry.

Mr R Mofokeng (ANC) wanted more information on how many diamonds were cut and polished by SA companies and what their value was.

Mr L Greyling (ID) stated it appeared to him that the central idea of the Diamond Amendment Bill was for the state to buy a certain percentage of diamonds for use in the local industry. He asked why the local industry could not buy diamonds at the moment and what other assistance the government intended giving local companies.

Mr Schmidt pointed out that the two Bills had originally been one piece of legislation. He asked if the subsequent split had caused the absence of the Regulator from the Precious Metals Bill and whether a third Bill dealing specifically with the Regulator would not be required as was the case with the National Nuclear Regulator Act, for instance.

The Chairperson commented that beneficiation should not be the only rationale for the new legislation. Broad-based Black Economic Empowerment (B-BBEE) should be the most important objective and he asked how this would be achieved.

Mr Kekana asked if accurate statistics on the improvement in beneficiation levels would be available in future. Mr Molefe asked how compliance with the new legislation would be monitored and whether "manipulation" could occur at diamond export centres.

Mr Mngomezulu pointed out that one body, the SA Diamond Board, was responsible for accurate information about the local diamond industry. It had this information at the moment and would continue to compile it in future. He conceded that the Bills were initially one piece of legislation and that not everything had been transferred correctly when the separation occurred. The State Law Advisors had drawn the Department’s attention to this fact. The Bills that were handed out to the Committee were therefore outdated and Members would receive the correct copies after the Bills had been certificated by the State Law Advisors.

Foreign companies entering the local diamond industry would be expected to have a BEE partner and would have to comply with the requirements of the Mining Empowerment Charter. Compliance would be monitored through the licensing process. He assured the Chairperson that BBBEE would happen in the industry.

Mr Selekane pointed out that the Diamond Amendment Bill would ensure that enough rough diamonds were available for the local industry. Currently, the high price of rough diamonds prohibited many local companies from buying sufficient quantities. Government would assist the local industry by ensuring empowerment and by supplying enough rough diamonds to meet market demand. This would allow stimulation and development of the local cutting and polishing industry.

He added that less than one million carats of the approximately 40 million carats produced in SA, were cut and polished locally. SA produced high quality diamonds, but in comparatively small quantities. This meant it ranked in the middle of global producers by value. Under-valuation of diamonds was a very serious offence, but he was confident that the market would decide on a fair value for diamonds. The government would not become involved in the price determination of diamonds.

Mr Mngomezulu pointed out that the SA Diamond Board had inspectors to enforce compliance with existing legislation. These inspectors would also enforce compliance with the new legislation.

Mr Schmidt asked why the SA Revenue Service (SARS) would play such a limited role under the Precious Metals Bill considering the major role they played under the Mineral Rights Act. He commented that the maximum fine of R1 million was too little, while imprisonment of up to 20 years was usually reserved for the worst crimes. He argued that offences should be penalised by much higher fines as this would hurt the offenders the most. He also asked why the jewellery register would be scrapped and why silver was being removed from the precious metals group.

The Chairperson pointed out that the Commissioner of Police would play a central role under the Precious Metals Bill, but asked why National Treasury had been involved in the past. He also wanted more clarity on the permit that would allow for transport of precious metals.

Mr B Guthrie, Deputy Director: Mineral Laws, Department pointed out that it had been common practice in the past that different sections of laws were administered by different departments. National Treasury had been involved due to exchange rate considerations, while the predecessor to SARS, the Receiver of Revenue, had dealt with customs and excise matters.

Mr Callaghan indicated that the jewellery register would be scrapped because jewellers would no longer be allowed to buy unwrought precious metals. The register would therefore become obsolete. In addition, the SAPS had complained that they did not have the resources to enforce compliance with the register.

He added that silver would be "delisted" as a precious metal because its price had dropped too low. Currently, a transport permit was required for every single trip that was undertaken. In future, one licence would cover all transport of precious metals. A separate import permit would be required; among others to establish the origin of unwrought precious metals.

Adv Mononela pointed out that the Criminal Procedure Act provided guidance on penalties for offences. However, he conceded Mr Schmidt’s point about the level of fines and undertook to revisit the issue.

Mr Schmidt asked if the Precious Metals Bill would force mining companies to beneficiate raw materials or whether they would simply be required to provide resources to other industries.

Mr Mngomezulu stated that mining companies would not be forced to become "jewellers". However, they would have an advantage if they did because government would grant them off-sets against the Mining Empowerment Charter. Some companies were interested in playing some sort of role in jewellery. For instance, the Department was in discussions with Gold Fields and AngloGoldAshanti about a pilot project in which jewellers would buy raw materials from the companies without paying in full up front. Bank guarantees for the outstanding amounts would be put in place and the jewellers would pay the companies in full after they had sold their jewellery.

The Chairperson closed by stating that the Committee had been calling for more local beneficiation for years. It was therefore good to see progress on this issue. He added that the Committee would hold public hearings on the Bills and would undertake an international study tour during the parliamentary recess to investigate international practice. This, he felt, was crucial before the Committee considered the two Bills.

The meeting was adjourned.