MSK – Diamond Article

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On Wednesday the 7th September 2016 the High Court of South Africa, Gauteng Division, Pretoria, handed down a landmark decision in the matter between South African Diamond Producers Organisation (SADPO) and the Minister of Minerals and Energy NO and others. The applicant SADPO is an association of nearly all junior miners in South Africa numbering approximately 300 different mining companies.
Before dealing with the legislation and the judgment it is necessary to give some background and insight into the workings of the diamond industry in South Africa.

The diamond industry has always been highly regulated due to the fact that for many years this industry proved to be part of the life blood of our economy.

It must be understood that the average miner is not always fully aware of the true market value of the diamonds which he wins. He may be a first class miner but this does not mean that he knows the workings of the international markets and in particular the state of the industry in Antwerp, Mumbai, Tel Aviv and or New York.

There are many urban legends where foreign diamond dealers came to South Africa and negotiated directly for the purchase of a rough diamond with the miner himself. The legends relate to cases where, for example, the foreign buyer came to South Africa, purchased a rough diamond from a miner for R100 000 and sold the same diamond on the plane going home to another international diamond dealer for $100 000 US Dollars. These legends are indicative of the fact that the South African Miner does not know the international market price for his diamonds.

A practice developed in terms of which miners offered their diamonds for sale by way of closed auctions (tenders) which operated as follows:

Instead of the South African Licensed Diamond Dealer buying the rough diamond at the tender and then looking for an overseas buyer who would pay “top Dollar” for the diamond, the practice developed on inviting overseas buyers to be present with the South African Licensee when he viewed and/or purchased and/or procured his stock in trade as it were.

This was only possible and permissible because Diamonds Act (the Act) never ever forbade the overseas purchaser from being present at the viewing, negotiating and/or finalising of a rough diamond sale.

So the licensed South African Diamond Dealer more often than not was accompanied at the tenders by an international diamond buyer from abroad. This foreign customer was not entitled to buy rough diamonds in South Africa since only licensed South African Diamond Dealers are entitled to purchase rough diamonds in South Africa and then export them to their customers abroad.

The advantage of the tender system to the South African Diamond Dealer was that the international buyer who accompanied him to the tender would indicate to the South African Diamond Dealer the goods which he wished to purchase and the price which he was prepared to pay. The South African Diamond Dealer would then submit a bid. If the South African Diamond Dealer was successful in his bid for the diamonds he would then be obliged to purchase the diamonds outright in his own name and then in accordance with his licence, onsell the goods to the international diamond dealer and export them to him, all in accordance with the provisions of his South African Diamond Dealers Licence.

Notwithstanding the fact that the overseas purchaser was present, in the first instance, at the viewing and finalising of the diamonds purchased by the South African Licensee, this did not detract from the fact that in the first instance the South African Licensee in fact purchased both de jure and de facto the particular rough diamond or diamonds as the case may be. A valid sale both in terms of the common law as well as in terms of the Diamond Act came into being even though the South African Licensee was comfortable with the fact that he had a purchaser for the stone already lined up.

The South African Licensee was then obliged to comply with various rules and regulations before exporting the diamonds to his overseas buyer.
This system worked extremely well for all concerned. It ensured that the miner got “top dollar” for his goods because the international buyer knowing the markets abroad was bidding against his competitors, who in turn were also fully aware of the international market prices for rough diamonds.

The South African diamond dealer always remained the “king pin” in the system; the Tender House was kept busy. The South African Diamond Cutting and Polishing expert was also always ensured of a regular supply of rough diamonds from the tender houses if he was astute enough to win tenders for the goods he wanted to cut and polish. In fact the South African manufacturer was always ahead of the game because he was on home ground and did not have to incur the costs of travelling, board and lodging in South Africa and also the inconvenience of being away from home and his office.

The new amendment to the Diamond Act No. 56 of 1986 and in particular Diamond Amendment Act No. 29 of 2005 and Act No. 30 of 2005 (amendments) sought to put an end to this practice. The amendments effectively sought to destroy the system which had worked so well for all concerned for so long. With all the respect in the world to the Legislators in South Africa the new Legislation made absolutely no sense.

It was in effect Section 20 (A) which was the offensive and destructive provision of the amendments, which had the effect of depriving the small diamond miner of his potential to recover the true international market value for his goods. It is obvious that if the miner has no incentive to work, that the whole diamond mining industry in South Africa will collapse. It may be worth mentioning, that at the time of writing this article the small diamond mining industry is in distress, probably the worst in the history of the diamond industry in South Africa.

Let us now examine the offensive section which has to all intents and purposes excluded international diamond buyers from attending the tenders which in turn leaves the diamond miner without the opportunity of achieving the best price for his diamonds.

Section 20 (A) reads as follows:
“20A. Assistance by non-licensed persons prohibited

1. No licensee may be assisted by a non-licensee or holder of a permit referred to in section 26 (e) during the viewing, purchasing or selling of unpolished diamonds at any place where unpolished diamonds are offered for sale in terms of this Act, except at a diamond exchange and export centre.

2. No holder of a diamond trading house licence referred to in section 26 (f) or any other person authorised in terms of this Act to sell unpolished diamonds may allow the assistance prohibited in subsection (1).”

In the case of SADPO versus the Minister of Minerals and Energy quoted above, the applicant submitted that Section 20 (A) constitutes an arbitrary and/or irrational regulation of the right of producers, diamond dealers and the holders of diamond trading house licenses to choose and practice their trade freely and thus infringes section 22 of the Constitution in that –

1. There is not sufficient reason for the regulation in question; and or

2. There is no rational connection between Section 20 (A) and the legitimate government purpose of the Amendments; and/or

3. It goes much further than what is necessary to achieve the purpose of the Amendments, i.e. the effect of the amendment is disproportionate in relation to the legitimate government purpose they seek to attain.

SADPO alleged that over a period of the last seven to eight years the effect of Section 20 (A) on the trade of small scale alluvial producers, dealers and the holders of diamond trading houses was disastrous and not proportional in relation to any legitimate government purpose which could be served thereby.

SADPO submitted that since the new amendments to the act and in particular Section 59 (B) there was no need for Section 20 (A). Section 59 (B) provides for diggers to be allocated their production cycles and to allow The State Diamond Trader to purchase the first 10% from such production during the cycles determined. The price of such diamonds was fixed by the South African Government valuator who was not obliged to take cognisance of the international price of the diamonds.

The idea was that the State Diamond Trader after purchasing the first 10% of a miner’s production at very reasonable prices, would then onsell the diamonds to the South African manufacturer thereby giving the South African manufacturer an advantage of being able to purchase the diamonds below the international market prices.

If this was the case there was absolutely no need for Section 20 (A) to exist. The Court held that for the reasons as motivated above that Section 20 (A) was therefore unconstitutional. The Court felt so strongly about this point that it even interdicted the Minister of Minerals and Energy as well as the Diamond Regulator from enforcing in any way the provisions of Section 20 (A).

As previously mentioned this was a landmark decision which was very well received by the entire industry which will no doubt benefit substantially as a consequence of this decision. Application has been made to the Constitutional Court for leave to appeal the decision.

BY :
MICHAEL STANFRED KARP
Senior Partner at
Cranko Karp & Associates Inc
Attorneys for SADPO (the Applicant)

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