South Africa’s alluvial diamond miners hampered by lack of government support, funding and inappropriate regulations

Amo Marengwa is the son of Dr Ben Marengwa, SA’s first black geologist. After Dr Marengwa passed away, Amo and his three brothers decided to continue some of their father’s projects, one of which was prospecting for diamonds in Taung, North West Province. They grew up in the area and know local people and customs.

Their company, Blue Banjo, applied for and was granted a prospecting right on a property that has been well explored and partly mined previously. They put in R13m of their own savings for a processing plant so that they could begin bulk sampling.

That is where progress has stalled. They don’t have the working capital to start operations and no institution – not the Industrial Development Corporation, nor the banks – will lend it to them.

“There are no proper support mechanisms for new entrants to the industry,” Amo Marengwa says. “The battle to find funding is forcing many black mining entrepreneurs to rent out their land to the better-established white miners. Apart from the funding, we face two other serious challenges – lack of access to geological information and lack of access to markets.”

He accepts that government cannot extend direct help but says an enabling policy environment is lacking. “If government cannot help and the number of larger, white-owned diamond miners who might be potential partners is dwindling, who is left? The only way government can truly help the industry is by growing the pie: enabling the established miners to flourish and requiring them to assist the emerging miners,” Amo says.

But he doesn’t believe the current 26% or 30% black equity ownership laws provide the enabling framework. Emerging black miners don’t have the funds to buy those stakes or the ability to wait five years or longer for trickle dividends to pay them off, assuming white-owned companies will finance them.

Lyndon de Meillon, a geologist, is the founder of Paleostone Minerals, a consulting company to the diamond sector for the past 20 years. He moved into alluvial diamond mining five years ago. He states that permitting issues are one of the alluvial miners’ greatest concerns.

“The regulatory requirements, costs and red tape involved to obtain a prospecting or mining makes it too difficult for a start-up company to fulfil. It also takes well over a year to get a permit, yet the average life of an alluvial diamond concession is only 1.3 years,” says Lyndon. Fulfilling all the requirements for a permit application requires specialist consulting skills which can bring the cost to R1 200 000.

Yet, Lyndon says, there are people with no experience or background in mining who have secured permits. Many of those permitted areas lie untouched for years, but despite the “use it or lose it” principle of the Mineral and Petroleum Resources Development Act, no action is taken against the permit holders. Alternatively, they are contracted to existing operators thereby further negating critically needed transformation and creation of black mine owners and operators.

26% black empowerment ownership requirements are impractical for privately-owned alluvial diamond companies, which comprise 99% of the industry. The lack of bank financing for alluvial diamond mining makes it very difficult for black entrepreneurs to buy into an existing company.

“One of the reasons that financiers shy away from alluvial diamond mining is that it is a very high-risk business,” Lyndon says. “Grades are extremely low, at about 0.3 carats per hundred tonnes. Some areas yield very little, others are more profitable and occasionally a special stone is uncovered, but it is impossible to predict their frequency. Average diamond values can vary by 300% from one month to another. Nevertheless, these challenges have led to the creation of a small diamond mining sector which has developed the experience and skills capable of successfully exploiting these unique deposits, utilising the most sophisticated diamond recovery technology the world has to offer.

“There should not be an absence of regulation,” Lyndon says. “Permits should be issued efficiently and faster and to people who have the appropriate skills and resources to use them.

“We can’t comply with ten-year social and labour plans when the average life of an alluvial mine is only 1-2 years. The transformation of ownership in the mining industry will only happen if there is skills transfer. Rather than putting the emphasis on equity stakes, the law should emphasise training and mentoring, which smaller operators could fund through contributions to an industry-wide development fund,” he adds.

Amo Marengwa also supports the idea of a non-governmental Mining Development Fund for junior miners, to which all mining companies should contribute 1% of gross sales.

“The fund should be intended to support black mining entrepreneurs and business entities in the raising of capital for projects at the development stage and develop them to a point until they are stable and sustainable or attractive for acquisition by larger companies,” says Amo.

“Some funds should be used for the creation of a BEE procurement company database. The database should include all BEE suppliers who offer their services to small mining companies and provide support through mentorship programmes.

“In addition, the fund money should be invested in skills development initiatives such as holding workshops on topical policy issues such as the raising of finance, health and safety and the Mining Charter,” Amo says.

The advantage of this sector that it is less capital intensive than most other small and mid-tier mining activities, particularly so gold and base metals, and hence does provide opportunities for new black entrepreneurs. Also, with the growing international shortage of larger, (+2 carats) high quality gemstone diamonds, and synthetic gems putting pressure on the small or Melee end of the market, South Africa’s alluvial industry should be a growth sector, not in decline.

According to SADPO, the alluvial diamond sector should be and stands ready to be a driver of transformation and an incubator of black-owned and operated entrepreneurial mining businesses – but only if policy makers recognise that the provisions of the mining charter and implementation guidelines currently have no basis in the realities facing small, privately-funded, entrepreneurial diamond mining businesses.

Amo Marengwa and Lyndon de Meillon are not alone in their concerns for the future of the small or Junior diamond sector due to the consequences of disabling minerals policy, inefficiency of the DMR and the requirements of one-size-fits-all mine health and safety laws and other unsustainable compliance-related costs.

During and after the Cape Town Mining Indaba held in February 2019, numerous role players, including existing large and small company CEOs, potential funders, practising mineral rights lawyers and foreign investors and companies consistently noted that the Charter required further improvement and was deficient in respect of the Junior and small-scale exploration and mining sector – notably that South Africa was lagging in exploration and simply not replacing the minerals that it was mining, that Junior exploration companies were forced to comply with the same rules that large operating companies comply with which is a huge barrier, and that Junior mining companies are overregulated.

Most recently, similar views have again been expressed at the Prospectors and Developers Association of Canada (PDAC) held in Toronto at the beginning of March. Key interventions proposed by the CEO of the Minerals Council of South Africa (MC) Roger Baxter, included a crack-down on corruption and unethical leadership, a significant improvement in licensing systems and turn-around times and creating a stable, predictable and competitive policy, regulatory and operating environment to encourage long-term investment in mining and restoring the sector’s competitiveness.

The reality is that exploration is a good capital raising space for junior black miners, but the current Charter fails to leverage this.