Marange Diamonds: A Game Changer?

By Michelle Smith — Exclusive to Diamond Investing News

Marange diamonds could be a game changer for Zimbabwe and for the diamond industry. In a nation desperate for revenue and investment,  diamonds could equate to an important economic solution. For the diamond industry, which is seeing a growing demand for low-quality small diamonds, the supply from Zimbabwe could mean stiff competition. But, the outcome largely depends on the government.

According to the Kimberley Process (KP), about 90 percent of Marange diamonds are coarse, very low quality, and range in color from dark green to dark brown and black. Their uniqueness allegedly makes them unmistakable. About ten percent of Marange diamonds are gem quality or near gem quality, with greenish and brown colors. Their features are not unique and they are comparable to diamonds found in other countries.

The KP oversees a certification scheme (KPCS) which aims to ensure that rough diamonds are conflict-free and that conflict diamonds do not enter legitimate trade. In November, the group endorsed the export of Marange diamonds, allowing Zimbabwe an opportunity to establish a potentially lucrative diamond industry.

Marange diamonds tarnished

The controversy that has kept Marange diamonds off the market until recently goes back to 2006, when the government encouraged free-for-all diamond mining, which led to a diamond rush and subsequent reports of rampant smuggling.

Such a situation, where people are allowed to dig at will, is a violation of KP minimum standards, which state that diamond mining must be regulated and controlled. However, efforts to mop up that mess only resulted in a much larger one.

Police forces were initially given the responsibility of clearing and securing the area. Their operations led to allegations of human rights abuse, corruption, extortion, and continued smuggling. Defense forces were later ordered to the scene, aggravating the matter further as soldiers were accused of inappropriate behavior such as dealing diamonds illicitly, using forced labor and child labor to mine diamonds, and killing about 200 people.

Following a review mission in 2009, the KP said there were “credible indications of significant non-compliance of the minimum standard of the KPCS,” and it agreed to enter a Joint Work Plan with Zimbabwe.

While the KP apparently believes Zimbabwe deserves an opportunity to join the global diamond trade, its approval has several strings attached. Reports must be made on investors, the regulation of artisianal mining, and the fight against illegal digging and smuggling. The KP decision also remains “under constant review.”

Concerns remain that rampant smuggling is occurring, and that only a small portion of diamond proceeds are going to the government. There are also worries that military figures are involved in the diamond industry, and that a significant amount of illicit diamond revenue is being used to bankroll President Robert Mugabe and other figures in the leading political party, ZANU-PF.

Zimbabwe is desperate for this source of revenue. As there has been noted interest from investors, Morgan Tsvangirai, Prime Minister of Zimbabwe and leader of the opposition party, Movement for Democratic Change (MDC), recently visited Marange and reported that he was pleased with what he saw.

A group of NGOs were reportedly granted permission to tour the controversial Marange diamond fields and are scheduled to do so on March 7.

Marange diamonds come to market

Even with endorsements and the KP’s green light, Zimbabwe has not been completely vindicated. Many opposed the decision, and the Rapaport Group is just one example.

Rapaport called on “ethical members of the diamond trade to cease and desist from the trading of Marange diamonds,” and announced that it will ban and publish the names of any parties caught selling them on RapNet.

Rapaport also issued the reminder that despite having been approved by the KP, Marange diamonds are subject to sanctions by the US, EU, and UK, making their trade illegal in those countries and among their citizens and entities.

Not all nations are taking a hardball stance against Marange diamonds. Indian and Chinese market players appear to be showing little prejudice, instead seeming eager about the opportunities that may exist. For India, this could include the creation of tens of thousands of jobs related to diamond manufacturing.

Caution in the market

Overall, the diamond market has been cautious this year. The wait-and-see attitude has been driven by a number of factors, including uncertain global economic conditions. Knowing that the market has cooled down significantly since early last year, buyers have been waiting for prices to fall. Their expectations have been met with resistance; likewise, many buyers have avoided large purchases.

Another factor contributing to caution in the market is uncertainty about the impact of Marange diamonds.

Market players are warned not to underestimate this flow of diamonds. For competitors, Zimbabwe represents a serious threat as it is expected to flood the market this year. While waiting for KP approval, billions of dollars worth of Marange diamonds have reportedly been stockpiled. This is not to mention miners’ current production goals.

At this week’s PDAC convention, Chaim Even-Zohar, Managing Director at diamond consultancy house Tacy Ltd., said the Marange diamond field could easily supply 25 percent of the world supply by value and 30 percent by volume by 2015.

Marange diamonds are expected to be greeted with much positive reception. A major appeal is that they are cheap, with Indian traders reporting that can be up to $60/carat cheaper. Some manufacturers have said tight cutting margins and Marange diamonds could relieve their pain.

Producers may attempt to seek security in the fact that they have higher-quality diamonds, but at least  half of what India, the largest cutting and polishing hub, imports is low-quality diamonds like those unearthed in Zimbabwe. Furthermore, there is high demand for this type of diamonds in many of the Middle Eastern and Asian markets upon which the growth of the diamond industry is believed to hinge.

Zimbabwe prime for investment?

Despite the green light on exports, diamond miners would be wise to exercise caution if considering opportunities in Zimbabwe. According to the latest reports, the government has a stake in all of the diamond operations that have been authorized so far.

African Consolidated Resources (LSE:AFCR) is a good point of reference with regard to risks. The company believes that it has the rights to a significant area in Marange, and claims to be ready to start production, but it is not even allowed in the area. Its dispute with the government dates back to 2006.

Securities Disclosure: I, Michelle Smith, hold no direct investment interest in any company mentioned in this article.