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ZCDC re-orients diamond valuation plan as it seeks ‘right market price’

12 march 2018

morris_mpofu_xx.jpgAt some point experts claimed that the Marange diamond fields contained between 2 and 7 billion carats of raw diamonds and that Zimbabwe was sitting on over 25 percent of the known diamond deposits in the world.

Others even put the value of the Marange deposit at $800 billion.

The majority of the stones mined in Marange were believed to be largely industrial while the quality gem stones were said to be not more than 20 percent.

However, it is not a secret that the diamond fields failed to boost the country’s economic fortunes.

Politicians claim that between $13 billion and $15 billion in diamond revenues was stolen from Marange.

ZCDC, a company formed in 2016 to clean up the mess in Marange, thinks that they can make diamonds contribute meaningful revenues to the fiscus through transparent mining operations.

Company chief executive Morris Mpofu told Rough & Polished’s Mathew Nyaungwa on the sidelines of a mining conference in Cape Town early February that the stones from Marange were heavily under invoiced and underpriced, which prejudiced the state of much needed revenue.

He said, under his guidance, ZCDC had re-oriented its valuation framework and diamond value management through cleaning to ensure that the company get the right market price for its stones.

Mpofu also said the company was open to form partnerships with foreign firms.

Below are excerpts from the interview.

Can you shed light on how the Zimbabwe Consolidated Diamond Company (ZCDC) came about as well as the state of your operations?

ZCDC is a wholly state-owned company whose shareholding is from the Zimbabwe Mining Development Corporation (ZMDC) and we were established by government as a conglomerate to consolidate all the mining concessions which were previously mined by the joint ventures that were there in the past [in Marange]. So, we started operations in March 2016 at three sites on those mines and our special grant of about 795 000 hectares of conglomerates… I think also from the onset I need to demystify and address the perception that the state-owned company ZCDC was established to consolidate the Marange mining companies. We were not consolidating mining companies, we were consolidating mining concessions, which had expired for those individual mining companies. So, government – noting that there were challenges of transparency, accountability on the declaration of receipts, under-invoicing of foreign currency receipts, non-declaration of fiscal revenues on the taxes and the like – then decided to establish this company. So, we were established to ensure that we bring total responsibility, accountability and transparency in diamond mining. Since we have been established – now just under two years – we have transformed the mining framework for diamonds to come up with a new business model that responds to government demands and that ensures that it commits itself to the fundamental facets that I have just indicated, which are transparency, accountability, and responsibility. When we say accountability, we mean that we need to be totally accountable to the public. We need to produce diamonds in a manner that ensures that we fully account for all the receipts and also ensures transparency by declaring our production, declaring ourselves so that the public knows every time what is happening in diamond mining. As you are aware diamonds are a very sensitive product shrouded in secrecy in some areas and some countries and mines and this is what we are trying to demystify by establishing ourselves in the manner that we have modelled our business model.

Are you still mining alluvial diamonds in Marange?

We opened in March 2016 (I myself joined ZDC in March 2017) and when we started we were concentrating on alluvials because we were taking ore from where those miners had left, but we also invested in exploration and evaluation to try and establish the confidence levels that are there because what we noted was that as these mining companies were mining alluvials there was no reasonable investment into exploration to plan for the future because you know alluvials are a quick win, take and go. This is what was happening, instead of planning to invest into evaluation of the resources so that you build confidence levels and be able to ensure you build sustainable mining, so in our model we had to ensure we come up with organisational stability, business growth and mining sustainability. Business growth then required that we evaluate resources. So we then evaluated resources in the short space of time that we did investment, it was very intensive and we established that alluvials had depleted, in fact rich alluvial deposits in those locations had depleted, so we had to plan ahead and now start exploration and evaluation to move into the conglomerate because it is the next quickest win since it is also open-cast mining. So, we then developed a model for conglomerates that we have started to implement.

So, in other words, you are saying that ZCDC is currently mining conglomerates?

Yes! I want to say that as we got to the end of last year maybe last quarter we were doing 90 percent alluvials and 10 percent conglomerates. Today we are doing 90 percent conglomerates and 10 percent alluvials. We have a new plant that we have installed, which would be soon commissioned by government so that we get 100 percent conglomerates, which is going to increase our capacity of utilisation from 30 to 80-90 percent.

In terms of carats, what will you be looking at per year once you increase your capacity utilisation?

I cannot tell you the projections now until we kick-off the plant, but suffice it to say that we are targeting the conglomerate side to produce 200 000 carats plus every month.

The so-called legacy Marange mining companies often said they failed to access capital to dig deeper, are you well-resourced?

I wouldn’t agree with you that it was lack of resources that prevented them to dig deeper, because alluvials were giving them easy cash, very easy cash with low cost of production per carat, which the gains from alluvial mining were supposed to be re-invested into digging deeper, but we were capitalised by government so we used that money … to purchase the right equipment, the right plant and continue with exploration so that we can dig deeper.

How much did you get?

We got about $80 million from government.

I heard your new mines minister saying that this year you are looking for $187 million (interrupted)

Yes! Now this is for business growth because we are operating three mines at the moment and we are likely going to open another three mines this year we are already advanced in terms of the evaluations that we are doing to open those three mines.

Who previously owned the three concessions you are currently operating from?

The ones we are mining at the moment is ex-Marange, ex-Mbada and ex-DTZ-OZGEO, which is in Chimanimani.

You haven’t touched the other concessions?

Yes, we are doing it in stages, there is an expectation that you go there and all of a sudden you open seven mines. It’s not possible you need to evaluate the resources, you need to have confidence levels, upgrade resources to invest in grade so that you can open that mine. So that’s why we are doing it systematically and there are some mines, which we cannot open maybe because the former miners did deplete the resources, but we may look for greenfield investments in the same areas. We are still searching for the source of Zimbabwe’s kimberlites. So, we are investing in exploration, we are moving outside the Marange area. We are going to Mwenezi and Chihota to look for the kimberlite so that we have mining sustainability.

Talking of exploration, I once had an interview with your former minister Walter Chidhakwa and he told me that you also had exploration activities in Penhalonga, apart from Chihota. Did you abandon your exploration work in Penhalonga?

Oh, that time we were involved in exploration in Penhalonga because we were also assisting in gold mining, but in Penhalonga there are also indications that there might be diamond deposits. However, at the moment we have not invested in that, we are concentrating on what we consider to be potential quick wins because you know with exploration, in some cases even the companies like De Beers and Alrosa, it takes 10 years or so to start a kimberlite mine, but we don’t have that luxury ourselves. We want to go to where there is recent data and then we reduce the time because we are going to operate on the basis of what we call the three half-times – the three being half the time, half the operating cost and half the capital cost because Zimbabwe does not have time. When we say we are open for business we want dollars today, government is looking for fiscal revenue, foreign exchange, so that they can back-up the development of the country and stability of the economy. So, we need to generate revenues today.

So, you are currently involved in only two exploration projects?

Yes!

That is Chihota and Mwenezi?

Yes, Chihota, Mwenezi and also the production geology as we move, so we are investing immediately $20 million and we are already mobilising ourselves to move to the sites working in partnership with mining promotion council owned by government, which is responsible for geology.  
 
I read recently that there was a diamond rush in Chiredzi, south-east Zimbabwe (interrupted)

Oh yes there was a recent diamond rush in Zimbabwe and as mandated by government to mine diamonds when we hear such news we also rush so that we are able to ring-fence and protect the government resource. We did some quick geology, assessment and evaluation and it appeared those were just quartz. In fact, in that area there is no diamondiferous ores that can be of a worry, there were just quartz.

Do you see ZCDC forming a JV with a well-established diamond mining company?

Yes, diamond mining requires partnership. Why I say so, especially for Zimbabwe is that we are a young diamond mining country, we have not gotten into it yet in the manner that we should and as such we need partnership with those that have been there for a while, so we look for best practices, we look for cutting edge technology, we look for skills transfer and we also look for capital because we don’t have adequate capital. If you speak of the $187-million that we are looking for this year, it’s for the entire value-chain of our diamond production from the mine to the finger, so you see we need partnerships and we are very much open for business. As we seek for partnership, we are going to carefully screen and see who are the beneficial partners that we need to partner with. As we speak where we are mining we have already capacitated ourselves. We are set to go, we have a very strong balance sheet, so we would want to liberate on the strength that we have built ourselves so that we bring in partnerships and we grow in the manner that countries such as Botswana have done so. We are already working with Botswana in many areas. That was our first port of call. We recognise the 50 years that Botswana has in diamond mining, exposure and expertise, so we are tapping into various areas that we think are going to benefit Zimbabwe.

Has there been any interest from foreign firms to form partnerships with ZCDC?

There is a lot of interest especially at the Mining Indaba here, I think we had about 20 meetings with potential investors, suppliers and very high value, high level interested parties who would want to partner [with us]. It’s a matter of what model are we going to adopt to partner with anyone because it has also to be in the best interest of the country.

At some point you were said to have stopped diamond sales and had engaged Botswana to assist you evaluate your stones. Have you resumed sales or you are still stockpiling?

That is not the reason why we stockpiled. Let me start with the reasons why we stockpiled: it was because the system for marketing of our diamonds got distorted during the legacy period that am talking about, it got distorted, we were having under invoicing, we were not getting value for our diamonds and that underpricing was prejudicing the country. So when we got in with a new model of mining we thought that we need to re-orient even our marketing structure for diamonds, even our selling of diamonds, so we stopped supplying the market and started stockpiling whilst we were engaged in effective value management, which meant that we wanted to ensure that by the time we go back to sell we have addressed all the bottlenecks, challenges, the rigidities… When we were in that mode we were also looking for expertise and that’s why we searched far and wide to get the expertise so that they assist us to bring up the value [of our diamonds]. We have now gone back to the market, this first quarter. We could not sell in the last quarter [due to the holiday] but starting this year we’re glad that looking at the market fundamentals prices seem to have adjusted upwards. We are back on the market, we have three tenders that we are running this quarter to sell over 1 million carats.

Are you convening these tenders in Zimbabwe or you are targeting international trade centres such as Antwerp and Dubai?

On this particular stock and as far as government policy is concerned our Minerals Marketing Corporation Zimbabwe (MMCZ) is the one conducting the tenders back home. We invite buyers, they come and view, submit their bids then we open the bids and award the purchases according to the reserved pricing that we would have set, which is a result of the evaluations that would have been done by experts. So we are currently selling home, inviting bidders but we engaged even with the mines minister, with Antwerp and other selling markets so that as we move to the future, as we increase our production, we can go to other markets and allow competitiveness so that we can increase the value of our diamonds and increase our revenues to government.

There had been a lot of talk that diamonds produced in the Marange area were of a low-value. Do you agree?

It’s not true that they are of a low value. If you look at the historical performances, there has been an up and down in prices. We have achieved prices over $100 per carat and those were alluvials, mind you, and if you look at prices that were very low like $30 per carat those were prices that were suppressed, under invoiced and underpriced. So, we are saying that we have re-oriented our valuation framework, the diamond value management attempt to ensure that we seek the right market price. That right market price is what is going to come out when everyone is honest to themselves when they look at the diamonds. We are glad that the comments that we got from the experts that assisted us is that we have diamonds of good quality and as we move into the conglomerate and further down to the kimberlite mining we know that we will improve in quality as we go. We improve in quality by ensuring that especially on the alluvial side there is an effective diamond value management through cleaning of diamonds. The cleaning process has to be very strict and tight to ensure you bring out the clarity of the diamond so that its value is easy to ascertain.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished