September 21, 2017

New Kid on the block – Zimbabwe Consolidated Diamond Company (ZCDC)

Africa is endowed with a wide variety of minerals from Gold through to Diamonds, however this has become more of a curse than a blessing, as most Africans leave in less than a US$ per day. In 2006 Zimbabwe was blessed with the re-discovery of diamonds in the Marange region (Chiadzwa Diamond Fields) prompting a number of players from local to international companies to claim a stake on this precious metal that had the potential to improve the fledging economy, however this was not to be, because of various factors such as illicit trading, incompatible business models, weak control systems, under regulation as well as poor corporate governance etc., – that prompted Zimbabwe government through ZMDC to consider the idea of consolidating all diamond mining operations into a single company.

Newton Mthethwa (NM) from African Mining Brief speaks to Marshal N. Mapondera (MNM), Associate at Clairwood Chambers about the proposed Zimbabwe consolidated Diamond Company (ZCDC) on the sidelines of the just ended Zimbabwe Mining Law Market Conference in Johannesburg.
NM.      Could you please give a brief overview of the proposed ZCDC and the motivation for the Zimbabwean  government to take that route?

MNM.      Currently diamonds in Zimbabwe are exploited by a way of Public Private Partnership Agreements between the government entity, the Zimbabwe Mining Development Corporation (ZMDC) and various foreign investors. In an attempt to boost production, profitability, and sustainability, the ZMDC proposed the incorporation of the single mining entity ZCDC with these foreign investors.

ZCDC is a joint venture between ZMDC and 7 different private owned diamond companies with interest in the Chiadzwa Diamond Fields- and the joint venture is set to be one of the largest diamond companies in Sub-Saharan Africa.
The overarching desire of government is to achieve better accountability and transparency in the diamond sector as well as to directly tackle the current decline in the industry mainly as a result of lack of exploration to generate new resources and inadequate capitalization.

NM.       Is it another form of nationalization or expropriation of the diamond industry by the government?

MNM.     This should be purely viewed as a commercial business transaction, rather than nationalization or expropriation as some would want to view it, because all the companies involved will have shared control according to an agreed management structure.

Between 2009 and 2014 Zimbabwe diamond sales were close to forty six (46) million carats. Total annual sales reached a peak of fifteen (15) million carats in 2012 driven by production from Chiadzwa Diamond fields, which contributed 97.3% of total sales. Needless to say, Zimbabwe has immense potential in the global industry as she is endowed with both mineralized kimberlites and sedimentary diamond deposits. The extent of the vast resource is virtually unknown as the last nine years of mining have been confined to alluvial deposits. Many people across the continent and the world over think that Zimbabwe “discovered” diamonds in 2006. To the contrary, diamonds were first mined under Cecil John Rhodes’ British South Africa Company (BSAC), when the country was colonized as Southern Rhodesia around 1892. The resource has always been there but had simply depleted due to the same reasons as today; little exploration and alluvial mining.

It is hoped therefore, that the ZCDC model will allow for greater return on investment (ROI) by directly tackling capacity constraints and control deficiencies. This means that the , ZCDC business model will bring varying expertise, greater exploration technics, marketing, equipment, etc. from experienced mining houses which will hopefully build a sustainable and profitable industry.

NM.          Public perception as well as the reaction of the unions regarding the ZCDC

MNM.     Like any other business model that is new, uncertainty is rife – job security during the transitional period and afterwards, how the new business will operate will obviously become a contentious issue- yes people will lose jobs because the new company will only take so much, however once exploration starts more benefits such as employment, increased productivity etc. will be seen. In other words, it is anticipated that the transitional period may be uncomfortable obviously but it is a necessary sacrifice as the partners seek to manage their resources at start-up; a perfectly natural progression for a business venture of this magnitude.

NM.       Every business model has its opportunities and challenges- what are the envisaged challenges and how will they be overcome?

MNM.      The major challenge perhaps is the HOW, which is what the participating entities will discuss and agree on. It’s a marriage, so obviously with such a relationship, there is loss of identity as partners build a new one together, you may therefore anticipate such things as cultural differences, differing business models, and differences in technical provisions or infrastructure etc.

  Current Policy Challenges

The current regime is adequately regulated (meaning that the laws in place are generally adequate save for natural update with respects to such aspects as exploration). There are some policy challenges, however, that may need review, which have made mining expensive and unsustainable. The fiscal policy is one grey area that needs to be addressed, for instance the government collects approximately 33 % tax (15% royalty fee + 15% VAT + 2% Resource Depletion Fee + 1% tender fee) from the diamond companies, and this is seen as an impediment to potential investors- a working model in this regard needs to be found. Greater and consistent security of tenure also needs to be introduced instead of the current 3 year special grant.

Government may also need to invest in local marketing through an easier process than what is currently obtaining. Diamonds are sold by the Minerals Marketing Corporation of Zimbabwe (MMCZ). The MMCZ process has delays in payments because of the various export formalities (diamonds are subject to intense scrutiny through the Kimberley Process Certification System – KPCS that aims to stop sale of “blood” diamonds).The process is a bit long and expensive even for sellers. Unless payment is made prior to delivery, the exporter bears the full weight of financing the working capital as well as the trade transaction as they have to continue operating while waiting for payment. There is therefore need to secure funding to finance the purchase of diamonds after the sale has been concluded with the producers. Perhaps, once a secure financing model has been facilitated coupled with some considerable reduction in “red-tape”, we could see a local internationalized market in Zimbabwe.

Infrastructure

Infrastructure is still lagging behind generally, and if the new company is to achieve its envisaged potential a lot still needs to be done. As explained above, the resources are there but the “surface” or alluvial deposits have been greatly depleted hence need for greater exploration to mine deeper. Further, Zimbabwe currently only does mining of rough diamonds without the cutting and polishing end of the production cycle. Government intends to derive complete value, hence there is need to invest in cutting and polishing to develop even the jewellery industry locally.

Despite all the grey areas identified, the future looks bright for the country through ZCDC. It is a mammoth task of course but nothing is entirely impossible, though the project might have a slow start it has the potential of becoming a fully sustainable and self-sufficient multibillion transaction that can take Zimbabwe’s economy many leaps into the future.

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