South Africa Envisions Glorious Possibilities

The sparkle of the diamond set in a flower of gold shines your ear lobe while beautifully studded color stones in platinum bestow you with heavenly splendor. Ever thought from where these mystic gifts of nature find their way to adorn you? Well, so many of them from Africa. %% The mineral-rich continent is the largest producer of gold, platinum and diamonds. In particular, the country which is blessed with profusion of these minerals is South Africa. Other natural gifts like alumino silicates, chrome, coal, ferro-chromium, ferro- manganese, vanadium and vermiculite are also found in plenty here. %% In March 2007, Diamond World sent its journalist Gunjan Jain to visit one of the most splendid places in the world-South Africa. The purpose of this week-long observation trip was to highlight South Africa’s potential and glorious possibilities as an international investment destination for multinational jewellery manufacturing companies.

Seeing is Believing

Amongst the lovely beaches, forests, wildlife and magnificent people lives a mineral-rich country that can be safely called the blood line of the global precious industry. During my trip I tried gauging different dimensions of the country that include its people, mining, jewellery manufacturing, latest government support and laws. The issue that echoed the loudest was beneficiation. Despite being one of the foremost mineral producers, South Africa is not amongst the developed economies of the world. The South African government has awaken to this stark reality and is now encouraging jewellery manufacturers from all over the globe to set up their manufacturing bases here rather than taking the resources back home. The notion of adding value, (better known as beneficiation) is emerging at a faster pace. Various strategies of the country are directed to attract global manufacturers and to encourage the natives to take up various processes of value addition. Black economic empowerment is yet another development the SA government is encouraging. Besides, giants like De Beers, Rand Refinery and Anglo Platinum Limited are lending helping hands for social upliftment commitedly. On the other hand several serious barriers blocking the path of progress in South Africa have been identified. However foreign manufacturers may find a better place to operate if the high crime rate is controlled effectively and rigid labor laws relaxed liberally. Also, towering metal finance cost discourages many potential investors. Nevertheless, the SA government is working for removing the prevailing road-blocks while helpful initiatives are in full swing for South African natives and local industry.

Treasure Trove of Gifts :

The country is a cradle of precious gifts that make innumerable lives possible and joyful around the world. Ironically SA has not been able so far to ensure health and wealth for its own people. Hence, it becomes mandatory to support the beneficiation process vigorously and in all possible ways. %% This objective coverage is the result of research and the recorded material I collected and the places I visited during the trip. I have put in my best efforts to incorporate in brief everything relevant to the precious sector that SA is developing so painstakingly. Hope the coverage below that reflects the grandeur that the continent and in particular South Africa holds will be able to capture your attention.

Putting the Record Straight :

"It is a treasure trove with an abundance of mineral resources. It is the world’s biggest producer of gold and platinum and one of the leading producers of base metals and coal, while its diamond industry is the fourth largest globally. Apart from its prolific minerals reserves, SA also has assets above ground that are far more valuable and essential to our economic sustainability and the wellbeing of our nation People. Our industry is alive with possibility. It contains within it highly creative visionaries – people who can look at a lump of metal or rock and fashion it into something beautiful, desirable, something worth acquiring. Our jewellery design, manufacture and distribution industries are relatively small in global terms, employing around 21,976 people in total. Businesses are privately-owned (and family owned in 90% of the cases). It is estimated that there are 2,850 manufacturers – 350 of which are in the formal sector and 2,500 in the informal sector. We have an active polished diamond market with a wide range of goods being freely traded. The diamond cutting sector employs approximately 2,500 people and comprises 18 DTC Sightholders and over 400 other licensed diamond cutting concerns who obtain their rough diamonds from De Beers, Diamdel, other rough suppliers and the open market. It is estimated that there are 3,000 independent jewellery retail stores in SA. Retail sales of all jewellery (including silver, gold, platinum and gem-set watches) amount to approximately 2% of the global market share. %% SA is a world leader in mining, yet its mining industry is far from being tapped fully. The country’s mineral resources account for a significant proportion of both world production and reserves and SA mining companies dominate many sectors globally. But our downstream beneficiation industry remains small; tiny, in fact."

MINERALS IN ABUNDANCE:

The African continent is blessed with massive mineral reserves. Huge deposits of metallic ores such as gold, platinum, copper, titanium and iron (from which stainless steel is derived) are predominantly found in the continent. Diamond is yet another category of precious products where Africa ranks as number one. The continent is also known to be the clearing house of precious stones. %%{{ Dawn of Diamonds : }}%% For long a producer of diamonds, the continent is also endeavouring to become a diamond manufacturing centre, with plants being opened in Botswana, Namibia and Angola in recent years, as beneficiation goes on. Out of an estimated 170 million carats of diamonds mined in 2005 sold for US$12.7 billion, African countries produced around 60 million carats. The largest producer, both in Africa, and in the world, is Botswana with an output of 32 million carats worth US$3.3 billion, constituting 25% of the world’s total by value. Botswana is followed by South Africa with over 15 million carats worth US$1.5 billion, and Angola with more than six million carats, exported for US$1.03 billion. %%{{ Ensuring ‘Clean’ Diamonds : }}%% The Kimberley Process has provided a real boost to the credibility of diamond production in Africa, which was formerly plagued by problems related to Conflict Diamonds. %%{{ De Beers at a Glance : }}%% De Beers Consolidated Mines (DBCM) is part of the De Beers Group of companies and a stand-alone entity based in South Africa. The company has 6,136 permanent employees and six mining operations: %% Finsch Mine in the Northern Cape and Cullinan Mine in Gauteng are underground operations; %% Venetia and The Oaks, both in Limpopo are open cast; %% Namaquland Mine in the Northern Cape is both open cast and surf-zone mining; and %% Kimberley Mines also in the Northern Cape reprocess surface dumps (tailing resources). %% Mining ceased at Kimberley underground operations and at Koffiefontein Mine during 2005. The latter has been temporarily placed on care and maintenance in preparation for closing or disposing off the mining assets.

De Beers Exploration Continuing

DBCM is undertaking exploration in the Limpopo and Mpumalanga provinces, in a joint venture with Mvelaphanda Resources as Ndowana Exploration. The company is also actively conducting Brownfields Exploration at a number of its mining operations. The most significant of this work is focused at the Venetia and Finsch Mines. Exploration on the West Coast, at Namaqualand Mines, continues and an offshore exploration program is under way in the South African Sea Areas Mining License to support the medium-term mine plan and future expansion of production capacity.

Efforts for Social & Economic Welfare:

In November 2005, De Beers announced a unique BEE deal – the sale of 26% equity interest in DBCM to Ponahalo Holdings, a broad-based black economic empowerment (BEE) company, ahead of the Mining Charter target of 2014. Ponahalo Holdings will be jointly owned by Ponahalo Capital and De Beers employees and pensioners. %% In Kimberley, DBCM has invested R50 million - transforming the Big Hole Mine into a tourism centre, creating jobs and business opportunities for the community. %% The Matafalang Small Business Development Initiative was recently established by DBCM to provide financial assistance to develop business opportunities, promote black economic empowerment and to guide Small & Medium Enterprises (SME) businessmen and women to succeed and strengthen their business, in areas where the company operates. %% The De Beers Fund invested more than R3.5 million in 22 HIV/Aids-related initiatives in 2005. %% More than 40% of De Beers’ funding is channeled to education initiatives. %% The DTC Shining Light Diamond Design Awards, launched in 1996, promote South African jewellery design talent and create opportunities for skills development and jobs creation in South Africa. %% "The closure of Koffiefontein and the underground operations of Kimberley Mines, which have for more than a century been the historic heart of De Beers has been an agonizing event. Closing any mine, however old, is a traumatic event but diamonds are a finite resource and both mines were long past their production life. It is reassuring that the Combined Treatment Plant in Kimberley will ensure that diamonds continue to be produced from the heartland for many years to come. The closures, and a business-wide review, led to a 20% cut in the DBCM workforce. The heaviest cuts were at management level. DBCM continues to work closely with the unions to minimize the social impact of the redundancies, including innovative plans to reinvigorate Kimberley’s tourist economy. %%{{ Excerpt from Nicky Oppenheimer’s statement on closure of underground operations at Kimberley mines. }}

Abundance of Gold:

Africa is blessed with this coveted metal in plenty, producing as much as 30% of the global output. Although South Africa is still the world leader in gold production, it also possesses the deepest mines and highest average production costs, and it is not anticipated that South African production will increase in the future. South Africa has dominated African and, indeed, global, gold production for over 100 years. The country holds 35% of global gold resources and exports 99% of its gold out-put. SA gold production origins from the Witwatersrand basin, extending roughly from Johannesburg in the north to Welkom in the Free State. Discovered in 1886, the basin boasted 19 of the world’s 20 largest gold mines for much of the 20th century. Over 50,000 tonnes of gold has been produced from the extraordinary sedimentary string. The Witwatersrand basin is the largest gold depository in the world and till date nothing has come even close to matching it in terms of size and wealth output.

World’s Largest Gold Refinery :

Situated in Germiston, in South Africa’s Gauteng province, Rand Refinery Limited is the world’s largest single-site gold refining and smelting complex. The company to date has refined in excess of 40,000 tonnes of gold, about a third of all the gold ever mined. The company offers a comprehensive package with its logistics, vault, treasury, refining and smelting services, as well as a range of value-added products.

In 2006, 39.2% of the ore processed was sourced from outside South Africa and 80% of Africa’s gold production (excluding South Africa) was refined at Rand Refinery.

Vital Indian Connection :

India is important to the refinery as it is the world’s largest gold jewellery market by volume, with nearly 808 tonnes of bullion imports in 2005. %% Rand Refinery was co-sponsor of AngloGold Ashanti’s first gold jewellery design competition in India: Auditions 2005-06.

Much Broader Role for Refinery :

|* "Traditionally Rand Refinery was seen as the end of mining process. With that perception came a collective mindset that limited our potential because we tended to leave it to other businesses to add the value. In fact, Rand Refinery is really a manufacturing facility. We have a much broader role than simply refining and smelting. Our expanded role must be to employ people to add value through, for example, the jewellery industry. We will be adding a lot more value in future and we are committed to expanding our facilities to produce a broader range of metal products on site. In this regard we also play a role on behalf of our shareholders since, through us, they can get credit for beneficiation initiatives that we undertake. Our function in this beneficiation role is complementary to that of our shareholders, particularly when it comes to training jewelers and promoting micro-manufacturers and goldsmiths. All these activities are part of our shareholders’ triple-bottom-line commitments and, although these initiatives will take time to take root in a significant way, we are committed to the long-term objectives of developing skills and providing sustainable jobs."*| %% - {{Alan Muir, M.D., Rand Refinery Limited %% Gold Zone : }}

Gold Zone, a joint initiative between Rand Refinery Limited and one of South Africa’s largest gold producers, has been specially conceived for investors. It aims to become an internationally competitive zone for manufacturing of jewellery from predominantly newly mined gold, intended primarily for export to global markets and marketing through the developing South African tourism industry as well as jewellery retail sector; %% To develop South African skills in jewellery design and manufacture through direct interaction with the industry, blending local and international talent to produce high-quality branded products; %% To establish a Gold Zone brand as a platform for marketing campaigns for Gold Zone jewellery internationally. Logistically, Gold Zone could not be better located. It occupies 3.3 hectares of Rand Refinery-donated land immediately adjacent to the refinery’s premises and within its closely monitored security perimeter at Germiston, in South Africa’s Gauteng province. %%{{ Strategic Security Ensures : }}%% Direct, secure deliveries of refined gold from Rand Refinery to Gold Zone’s jewellery manufacturing tenants; %% Jewellery manufacturing in a secure environment; %% Low rentals based on ‘nil’ land cost; %% Low service costs through economies of scale; %% Opportunities, convenience and creative stimuli that come from close proximity to a major economic, administrative and cultural hub such as Johannesburg; %% Cost- effective, joint marketing arrangements; %% Quick, secure transportation and handling of jewellery for export, using Rand Refinery’s well-established, efficient infrastructure. %% {{PLATINUM }}%% SA is the world’s leading platinum producer and accommodates over 80% of the world’s PGE reserves. Naturally occurring platinum and platinum-rich alloys have been known for a long time from South America. The PGEs are a highly valuable and much sought-after commodity. South Africa’s PGE production is sourced from the Bushveld Complex. Platinum supplies from South Africa totalled 5.11 million ounces in 2005, up by 100,000 ounces compared with the previous year. %% Demand for platinum in autocatalysts increased by 9% in 2005 to 3.82 million ounces. The diesel light vehicle sector in Europe continued to be the major propeller of growth in platinum demand, with purchases by auto makers in the region increasing by 2,80,000 ounces to reach 1.96 million ounces. In 2005, jewellery demand for platinum slipped below two million ounces for the first time since the mid-90s, falling by 9% to 1.96 million ounces. %% South Africa is the largest supplier of platinum globally. The supply from the country accounts to 4,650,000 oz. of the total global supply of 6,110,000 oz in Y2003 accounts for 75% of total supply. But in terms of beneficiation, apart from the refining of the metal, South African industry consumes less than 10% of the platinum produced locally with the local jewellery industry at less than 1%. Insufficient manufacturing capacity, Lack of investment in the enabling environment (including training and development) and Lack of metals financing are the major reasons for the prevailing position. SA is in the ideal position to take advantage of the market (following its massive reserves of platinum) by encouraging a local jewellery industry capable of producing reasonably priced platinum jewellery to meet the growing global demand.

Anglo Platinum Limited

The Group’s main operating mines include Rustenburg Platinum Mines (RPM) Rustenburg Section, Amandelbult Section and Union Section, as well as Potgietersrust Platinums Limited (PPRust) and Lebowa Platinum Mines Limited.%% The Group’s smelting and refining operations are wholly owned through RPM and situated in South Africa. These operations treat concentrates and matte from subsidiaries and from joint ventures. The Group holds a 22.5% share of Northam Platinum, acquired following a mineral rights swap in 2002. In Zimbabwe, the Group envisages holding a 51% controlling share in Unki Platinum Mine. Elsewhere in the world, the Group is involved in exploration in Canada, Russia, Brazil, and China. The Group has also established a representative office in Beijing.

Chief Executive officer’s review of various functions of the company Safety & Sustainable Development :

Various safety initiatives were launched in 2006 to achieve a step change in safety performance. Progress has been made on many fronts, but the step change still eludes us. We suffered 18 fatalities at managed operations and one at non-managed a joint venture, compared to 24 and one respectively in 2005. %% Excellent progress has been achieved again in lowering sulphur di-oxide emissions at our Waterval Smelter Complex.

Market conditions

Platinum demand continues to increase, driven by very strong demand from the autocatalyst market, particularly in the diesel sector. In addition, strong industrial demand growth increased derived demand by 13% resulting in an overall increase of 5% in total platinum demand to 7.02 million ounces. Prices reflected a high of US$1,390 per ounce in November 2006 with the average dollar price achieved by Anglo Platinum of US$1,140 per ounce. %% As expected, the volume of new metal used in jewellery manufacture decreased in response to the higher price, reflecting this unique dynamic of platinum demand that moderates price volatility. The US dollar value of new platinum for jewellery manufacture rose by 13%, reflecting continued brand strength. %% Palladium demand eased during 2006 in comparison to 2005 mainly as a result of lower sales into the Chinese jewellery market. %% Rhodium demand was well supported by the autocatalyst and glass sector, with price increasing to and maintaining a level close to US$6,000 per ounce on the back of speculative interest and some stocking by auto companies.

Efforts for Beneficiation

PLATAFRICA

In addressing local beneficiation of our country’s resources, the sponsorship of the annual PLATAFRICA Jewellery Design Competition represents our long-term commitment to stimulate and bars the demand for platinum jewellery globally while at the same time promoting innovation and technical competence in its design and manufacture. %% ORBIT FET College’s training program to promote platinum jewellery manufacturing. %% On December 2, 2006 the Small Enterprise Development Agency (SEDA), the Platinum Trust of South Africa (PTSA) and ORBIT FET College officially launched a world class platinum jewellery training and production center at Rustenburg Campus. This initiative will contribute to the growth the platinum jewellery industry by providing beginners with the technical skills to enter a career in jewellery manufacturing and design. The curriculum involves industry-based projects and students will be granted an opportunity to do in-house training with local manufacturers for getting jobs. The jewellery sector is a focus area for National Government and relates directly to mineral beneficiation, job creation and equity ownership as outlined in the mining charter.

Silver:

There are no primary silver mines in Africa. Most silver is produced as a by-product of lead, zinc mining and to a lesser extent, copper and gold operations. Morocco, South Africa, Zambia and the DRC are Africa’s main producers of the metal. Morocco ranked twelfth in world production in 1998 with 306 tons followed by South Africa which is ranked fifteenth in the world, producing 113 tons in 2002. South Africa’s largest lead-zinc mine is at Aggeneys-Broken Hill in the Northwest Cape. At Aggeneys -Broken Hill, the ores typically run at concentrations of several percent combined lead and zinc, as well as 200-300 grams/ton silver. The mine produces some 90 tons of silver per year. %%{{ Jewellery Manufacturing- South African aspiration: }}%% As stated before, value addition process will require increased number of people getting into manufacturing the end product. Besides, generating employment, it will also enable the country to maximize benefit from its inherent mineral reserves. Although not many have yet taken up Jewellery Manufacturing as a potential business prospect, but the ones who have find it very lucrative.

Alan Mair Jewellers:

{{Alan Mair}} is one of the largest jewellery manufacturers in South Africa employing close to 200 people. His factory produces a wide range of jewellery product for various retail outlets locally as well as export markets. Alan Mair forms part of the Gold Zone project established at Rand Refinery aimed at promoting a jewellery manufacturing cluster, though he is the only one to embark jewellery manufacturing in Gold Zone. According to him, there is still enough room for improvement in order to attract more people.

Studio C:

Studio C is one of the most technologically advanced manufacturers in SA owned and run by the Chairman of the Jewellery Manufacturers Association of South Africa. Following the rigid labor laws the company prefers to invest in advanced technological support like CAD CAM and laser equipments. Its major selling markets are local high end jewellery retail outlets. %%{{ Jenna Clifford: }}%% Launched in 1992, Jenna Clifford set a new trend in the jewellery industry globally. Jenna Clifford is the name behind 4 innovative and dynamic brands – Jenna Clifford Fine Jewellery, Renaissance by Jenna Clifford, Jenna Clifford Homeware and Jenna Clifford Trophies. Starting her craft on the factory floor over 27 years ago, Jenna Clifford has assimilated all aspects of the business and this has provided her with the insight necessary for the creative and practical aspects of her business. Trading only in fine cut diamonds, the brand constantly strives towards perfection. Jenna Clifford also specializes in a variety of top quality coloured gemstones.

Oro Africa:

Oro Africa manufactures high quality gold and fine jewellery. It excels in Italian jewellery and chains. For expansion it has bought an Italian company. Their intimate knowledge of world markets coupled with continuous investment in technology and people has equipped them to supply fine jewellery to customers across the globe. Their largest market is the USA, followed by the UK, Europe, Australia and sub-Saharan Africa. The company manufactures extensive range of quality chains in 9K, 10K, 14K and 18K gold. It also imports studded jewellery from various countries to sell in the local market

Launched in 1934, MINTEK has become a leading provider of minerals processing and metallurgical engineering products and services to industries world-wide. The Company’s world-class research and development expertise is supported by a physical infrastructure of modern laboratories, pilot plants and workshops. The concept beneficiation in South Africa can be well understood by the analysis below. %% Excerpts from the Report of Roger Baxter, Chief Economist, Chamber of Mines of South Africa

CREATING THE RIGHT FACILITATIVE ENVIRONMENT

"In SA, the discovery of diamonds in 1866 – coupled with the discovery of gold deposits shortly thereafter – catalysed the industrialization procrss, and mining is attributed to have provided the foundation for the development of Africa’s most industrialized economy. %% Despite the significant contribution of the diamond mining industry to the economic development of Botswana, Namibia and SA, these govermments are increasingly investigating how to add value to diamonds in an attempt to capture more benefits locally. Much of the focus is now being placed on how to encourage beneficiation.

There is little doubt that, given the right institutional structures and governance frameworks, minerals can be a positive force for development in developing countries. The discovery of diamonds in SA in 1867, and subsequent discoveries of gold, resulted in a sustained period of development that propelled the country to become the most industrialized in Africa. Much of the country’s original infrastructure as well as the manufactruring and services industries are attributable to the mining sector. Diamond mining in SA accounted for 1% of GDP;2,8% of merchandise exports; employed about 21 976 workers and paid $0,4 billion is salaries in 2005. That year SA was the third largest producer of natural diamonds with a 13% share.%% In all three southern African countries, the diamond mining industry accounts for significant multiplier effects: the development of associated industries that supply the mines, infrastructure in deep rural areas where the mines are located skills development and education, procurement, salaries and wages for workers, and so on, The diamond mining companies have programmes to empower local people in the industry, including promoting ownership and procurement from local sources. In 2005, 40% OF De Beers procurement expenditure went to black owned, empowered and influenced companies in SA. In that year, De Beers concluded a 26%black economic empowerment deal with a broad based black business and community grouping.

The concept of adding value or beneficiation, as it is called in south Africa- is a process of successive layers of adding value to diamonds, From mining to sorting to marketing to cutting and polishing to fabricating jewelley and again back to marketing the White paper: A Minerals and Mining Policy for South Africa, released in October 1998, has a useful definition of beneficiation: "The term beneficiation, used broadly to describe the successive processes of adding value to raw materials from their extraction through to the sale of finished products to consumers, covers a wide range of very different activities, These inclide large-scale and capital –intensive operations like smelting and technologically sophisticated refining as well as labour- intensive activities such as craft jewellery", In general terms, the countries that mine the diamonds are not the same as the countries that cut and polish the stones, or the major consuming markets for diamond jewellery, for example Belgium, India, China, Thailand, Israel and the USA account for 89% of diamond cutting and yet have no local mined diamond production Similarly, the USA, China, Thailand, Japan and Europe account for 92%of the value of retail sales of diamond jewellery and yet have no local mine production. Most of the value added in the diamond pipeline is at the retail sales level that is captured in the key end use markets, such as the USA, But even the cutting and polishing of diamonds is done in countries that have the skills and competencies to do so. The emergence of India and China as major diamond cutting centers is based on their very cost competitive cutting skills and very competitive operating environments, India, China and Thailand now account for nearly 70% of the world’s cut diamonds by value. %% For countries like Botswana, SA and Namibia to expand their cutting and polishing and jewellery fabrication industries, these countries will need to compete head on with India, China and Thailand, Growing the southern African cutting and polishing and jewellery fabrication industries is a challenge as labour costs are higher than in India and China. In the case of SA, the larger higher quality diamonds can be polished cost effectively. But to grow, the diamond beneficiation industries means that the southern African countries will need to develop the competitive advantage competencies that include very cost-competitive production, very specialized skills development, special economic zones, preferential tax treatment and incentives lower tax rates, access to key markets, development of knowledge networks around consumer needs so on.

It is vital that governments in the region recognize that diamond mining companies cannot create the cutting and polishing and diamond jewellery fabrication industries in southern Africa. The mining companies have neither the skills nor competencies to do so. It is not the simple availability of mined diamonds in the region that will make the difference. Rather it is the competitive advantage issues of special economic zones, a focus on smart tape versus red tape, favourable tax environment, skills, markets and so on, that will be the determinants of success. So for, some of the governments in the region have tried to place pressure on the mining sector to try and force beneficiation outcomes. But increasingly, the debate is shifting to the right area in the form of the cutting and polishing and jewellery fabricaion sectors. The key to unlocking further beneficiation in the diamond sector is the creating of the right facilitative environment in which the diamond cutting and polishing and jewellery fabrication companies can thrive. In this regard, the governments in the southern African region have much work to do.