The recent move by the Zimbabwean government to suspend all diamond mining concessions in Marange and Chimanimani, and to freeze the equipment of companies operating there has sparked outrage by both investors and foreign governments. The real reasons behind such move are still unclear. In a televised interview recorded in January, Mugabe claimed that the country was not receiving enough in terms of revenues, hinting at the fact that mining companies might have made disappear significant amount of diamonds. According to Mugabe's figures, so far the diamond business has generated only US$ 2 billion revenues, while the actual value of the diamonds mined would be in the range of US$ 15 billion. “A lot of swindling, smuggling, has taken place” said Mugabe, “and the companies that have been mining have virtually robbed us of our wealth. That is why we decided that this area should be a monopoly area, and only the state should be able to do the mining. You cannot trust a private company”.
But there is also a softer motivation behind the consolidation plan, which is to increase efficiency and start an expensive kimberlite mining project in the area. This view had already been expressed by Minister of Mines Walter Chidhakwa in the past couple of years, but has encountered resistance by concession holders, who doubt its feasibility.
Consolidation
The consolidation plan is only the last chapter of a long-term policy developed by the Zimbabwean government with the objective of taking over privately-owned companies. In 2008, President Mugabe signed the Indigenisation and Economic Empowerment Act, aimed at transferring the control of foreign enterprises to locals. The move was highly criticised by both international economic institutions and the local opposition party, the MDC. A similar attempt at seizing and redistributing land to local farmers in the early 2000s had been impaired by corruption and abuses, with members of the ruling party and their families obtaining most of the concessions. Agricultural production plummeted and the population was hit by a series of famine crises.
It should be pointed out that, as a result of the Indigenisation Act, diamond mining companies operating in Marange were already forced to enter a joint-venture with state-owned Zimbabwe Mining Development Corporation, which holds the majority (51%) of the shares. If the consolidation plan goes forward though, all these companies will be merged in a single state company called Zimbabwe Consolidated Diamond Company (ZCDC), which would be in charge of all diamond mining activities.
Diamond swindling figures
The most impressive thing about the Zimbabwean scandal is the amount of diamonds that have been allegedly subtracted from the official control of the government. 13 billion US$ worth of rough diamonds smuggled from the country is a figure hard to believe, and it is difficult to understand how this could have been done with complete impunity. Both villagers in the Manicaland area and the opposition have attacked the ruling party ZANU-PF, going as far as asking for Mugabe’s immediate resignation. In a recent interview with Rough&Polished, former Minister of Finance Tendai Biti said that the ZANU-PF had “put an infrastructure of deception and unaccountability towards diamonds”.
The Minister of Mines has promised an investigation over the alleged misappropriation: “We are appointing some companies to conduct a forensic audit of all the companies in order to establish how the companies mined the diamonds in the last five to six years depending on when they started operations," said Chidhakwa. Yet, it is quite surprising that in spite of such grave accusations, a proper criminal investigation has not been ordered. It should be the minimum in alleged cases of fraud and smuggling, some of which are of public domain. According to a recent investigation, in 2011 a company linked to the Italian mafia managed to smuggle around 1 million carats of diamonds, worth something between US$70 million and US$440 million, in one single trip to the country.
Kimberley Process: the elephant in the room
Up until now the Marange diamonds scandal has been mostly limited to the Zimbabwean political debate, but in the long term it might have severe repercussions on the whole rough diamond trade system. It is the Kimberley Process, in particular, which has to step forward to defend its reputation. According to the Certification Scheme, every rough diamond parcel should be accompanied by an anti-forgery certificate proving its provenience. These certificates have to be issued by the competent national authority, which in this case is the Zimbabwean Government. The government should therefore be informed of how many diamonds are being exported. If millions of carats of Zimbabwean diamonds have been sold unbeknownst to the authorities, then these diamonds have been smuggled without a valid certificate or, even worse, with certificates issued by a third-state, which is fraudulently claiming to be the producer of the diamonds extracted in Marange.
In any case it is hard to explain how KP monitoring authorities could have missed such a large discrepancy in diamond trade figures, considering that they should have full access to import, export and production figures for every participant country. The Kimberley Process Statistics website provides some figures on the number of diamonds officially extracted in Zimbabwe. Between 2010 and 2014 Zimbabwe mined 44 million carats (including from the pre-existing Murowa and River Ranch mines), which produced a total value of US$ 2.23 billion. All these diamonds have been regularly traded with Kimberley Process certificates. If it is true that further US$13 billion worth of diamonds have gone missing, this means that something between 16 and 250 million carats (depending on whether we are talking about a few exceptionally high-quality diamonds or many average quality ones) have been introduced in the legitimate market without a regular Kimberley Process certificate.
These numbers are simply too big for the Kimberley Process to ignore them, and this may not be a good thing for Zimbabwe, either. It should not be forgotten that until 2011 KP authorities cited lack of security and internal control over diamond smuggling as the main reason behind the ban on Marange diamonds. In face of the latest development such decision could be resumed once again, and this time Zimbabwe will have a hard time finding international support to protect its own interests.
Conglomerate mining
This is probably the reason why, parallel to the “diamond swindling” narrative, the Zimbabwean government is also pursuing another explanation for nationalising the diamond mining industry. The mining companies which have been operating in Marange up until now have been accused of not being willing to invest further to develop an industrial conglomerate mining process, preferring to scoop low-cost alluvial diamonds. In the government’s view, revenues from alluvial diamonds should have been reinvested in kimberlite mining. In truth both Mbada and Anjin have been developing conglomerate mining projects, while other companies, such as the DMC, have opted exclusively for alluvial mining since the beginning. According to those mining companies, though, Marange’s conglomerate is very low-grade, making diamond extraction not commercially viable. Minister Chidhakwa is pushing to obtain state of the art XRT sorting technology in order to curtail extraction costs, but even in that case it is unclear whether such an investment is justified in face of low-grade ore and generally inferior-quality diamonds coming from the Marange mines.
Compensations: not a credible offer
There has been quite an attempt by Zimbabwean authorities to play down the obvious outrage by foreign states and companies who have invested several million dollars in diamond mining activities just to see them seized by the government, but the truth is that the fight is on both at the diplomatic and legal level. President Mugabe stated in his televised interview that relations with China were excellent, and that he personally told China president Xi Jinpin that Anjin was not welcomed anymore in the country and needed to go back. This version was immediately refuted by the Chinese ambassador in Harare, who asked Zimbabwean authorities to “safeguard the legitimate rights of the Chinese companies and employees”. Similar remarks were made by authorities regarding Russian company DTZ-OZGEO, which is operating a small diamond mine in Chimanimani. The company, which was initially spared from the consolidation plan, had its concession cancelled in March. Minister Chidhakwa told the press in April that the company was supportive of the government’s policy and willing to sell all of its assets. But at a recent meeting in Zimbabwe, Russian Minister of Industry and Trade Denis Manturov reiterated the need for special treatment and consideration of the interests of DTZ-OZGEO.
The problem for every mining company is the complete lack of credibility by the government when it comes to paying reparations due for the expropriation of mining areas and equipment. Zimbabwe is, financially speaking, broke. At the end of 2015, Harare had arrears for US$1.15 billion with the World Bank, US$601 million with the African Development Bank, and US$110 million with the IMF. Unlocking the first loan from the IMF in two decades has been a priority for Zimbabwe this year, but IMF envoy in Zimbabwe Domenico Fanizza made it explicit that no loans will be granted until the US$1.8 billion arrears are solved.
With empty coffins, there is no chance that Harare will be able to pay due compensation to mining companies operating there. Accurate estimates of the total value of these concessions and equipment is hard to estimate, but just to give an idea, up to August 2011 Anjin had already invested US$380 million in developing the mine and in relocating the villagers to a new settlement at the ARDA Transau Estate, just west of Mutare. Even smaller companies such as the DMC, which operates on a comparatively small concession, had invested US$35 million in the mining project, plus US$7 million in relocation costs, by the end of 2011.
Lawsuits
As a consequence, mining companies have gone to court in order to protect their interests. Mbada Diamonds and Anjin have already challenged the government ban at the Zimbabwean High Court, obtaining partial victories such as the right to access the mining areas to protect their assets, after illegal panners had invaded their concessions. Yet, the core of this legal battle will most likely not be fought in national courts, but rather in front of an international arbitral tribunal. Chinese companies, as an example, have their investments protected by the 1998 Bilateral Investment Treaty, which rules out expropriation unless under exceptional conditions. One of these conditions is that expropriation cannot be completed until after compensation, equal to the value of the investment immediately before the expropriation, has been granted. As said earlier, this does not seem an option at the moment due to lack of liquidity by the government. Non-Chinese companies are also likely to seek similar forms of legal protections, based on multilateral treaties or even specific clauses contained in the concession agreements. In any case, it is unlikely that mining companies will accept Zimbabwe’s decision without putting up some resistance, and looking at the current situation it will be hard for Harare to justify their actions from a legal perspective.
Future scenarios
Predicting the future of the Zimbabwean diamond industry is not easy at this stage, since the situation could evolve in different ways. Yet, based on current information, it is possible to draw some likely scenarios in case the government does not backpedal on the consolidation plan.
The first scenario is one in which the Government resists pressure from mining companies and completes its consolidation project. This is the least likely scenario, as it would require support from a foreign company or nation to provide equipment, expertise and funding sufficient for the kind of high-tech industrial conglomerate mining that Minister Chidhakwa is dreaming about. At the moment such company or state does not exist, and it is unlikely to appear, considering that the country is still suffering from embargoes by the European Union and the United States, and that main investors such as Russia, China and South Africa may have lost confidence in the local diamond industry as a result of their companies being kicked out.
The second scenario is one in which mining companies, supported by their states, take a hard line with the Zimbabwean government and challenge its decisions both in arbitration courts and through diplomatic pressure in the form of a new Kimberley Process ban. While not unlikely, this scenario is the most dramatic, as it would cause a complete stop of diamond mining activities in the country for at least a couple of years, destroying the whole local industry and leaving many thousand people unemployed. This would be a lose-lose situation in which neither Zimbabwe nor the mining companies are able to generate revenues and must bear further costs in legal proceedings and in ensuring routine maintenance inside the diamond concessions.
Once all this factors are taken into account, the final and probably most desirable scenario is one that contemplates a compromise between the government and mining companies. Under such agreement, mining companies may agree to work officially under the umbrella of the ZCDC and to step up slightly the conglomerate mining, while at the same time channelling a larger portion of their revenues to the government. An agreement would ultimately save everyone’s day, but that does not make it less of a challenge to achieve. At the moment there is a huge gap between the demands of the government, which is under pressure from international institutions, and the financial concessions that mining companies can make, particularly considering that the output in terms of carats is declining in Marange. Yet, in the next few months, all parties will be likely involved in intense negotiations out of the public’s eye in search of a viable solution.
Matteo Butera, Rough&Polished
