South Africa has long been a significant force in the global diamond industry; however, it has faced regulatory and logistics headwinds which are placing pressure especially on the small and junior sector, Lyndon de Meillon writes.

De Meillon, an independent diamond producer, is the owner of Paleostone Mining.

He explains that South Africa’s diamond industry is divided into two distinct sectors.

Firstly, the junior and small mining sector concentrates on alluvial diamond deposits located adjacent to major river drainages in the North West, Northern Cape and Limpopo provinces, as well as along the West Coast.

Secondly, the large-scale sector, which is dominated by publicly listed companies such as De Beers and Petra Diamonds, focuses primarily on kimberlite mining.

De Meillon points out that the former plays a vital role in providing employment and fostering development in some of South Africa’s most rural and economically depressed regions.

While the alluvial sector produces only about 4% to 5% of South Africa’s total diamond output by carat weight, its contribution to the industry’s value is disproportionately large, he informs, pointing out that it accounts for about 25% of the yearly value of the country’s diamond production.

However, while the quality of alluvial diamonds is high, their mining grades are extremely low and the unpredictability of yields makes this a risky commodity to mine, he cautions.

De Meillon posits that the enactment of the Mineral and Petroleum Resources Development Act (MPRDA) in 2004 marked a turning point for South Africa’s small-scale alluvial diamond mining sector.

“Immediately following the introduction of the MPRDA, the number of alluvial diamond operations in the Northern Cape, North West and Free State provinces experienced a rapid and significant decline,” he avers, also citing statistics that show this downward trend which has persisted for over two decades.

De Meillon says that, prior to this, there were about 2 000 active small and junior diamond mining companies, collectively employing about 25 000 people, which exceeded the total number of employees of the large-scale producers combined.

By contrast, only about 20 companies remain now, employing about 1 000 people, he informs.

“This decline highlights the lasting impact of legislative changes on the viability and sustainability of small-scale diamond mining operations in South Africa. It fundamentally altered the landscape for small-scale diamond mining, making it increasingly difficult for these businesses to survive and thrive.

“The enduring consequences of these legislative shifts continue to shape the industry, with survival now limited to a handful of companies able to withstand the regulatory and economic pressures,” De Meillon asserts.

He points out that these regulatory pressures also impacted on larger publicly listed companies, with additional administrative and operational requirements making it harder to service existing debts.

De Meillon also attributes a sharp decline between 2004 and 2007 to the granting of mining and prospecting rights being contingent on compliance with black economic empowerment (BEE) regulations, positing that without financial mechanisms to assist BEE partners in acquiring equity stakes, and with profit margins too slim to absorb a 30% dilution, many businesses closed.  

Moreover, the global financial crisis of 2007 and the subsequent collapse in diamond prices compounded these challenges, he notes.

He also highlights “corruption and inefficiency” within the Department of Mineral and Petroleum Resources, the Department of Water and Sanitation and related regulatory agencies over the past two years as having curtailed the approval of mining and prospecting rights, hindering new opportunities.

De Meillon also says that successive updates to the Mining Charter in 2010 and 2016 caused more operators to close.

“The Diamond and Precious Metals Act also imposed costly and impractical regulations, often enforced by inexperienced officials, further complicating operations for small and junior miners as well as complicating established marketing mechanisms,” he avers.

De Meillon says higher electricity, water, fuel, diesel, safety and security and labour costs have compounded the challenges facing the small-scale diamond sector. 

“The outlook for the diamond industry remains highly uncertain. Shifts in both production and marketing dynamics are shaping its trajectory, with significant challenges ahead,” he predicts.

He hypothesises that currently, only the highest-grade kimberlite deposits, such as Jwaneng, in neighbouring Botswana, are likely to be profitable at prevailing prices.

“Many kimberlite mines are facing closure as more than 60% of their output has seen prices drop by 50% to 60%. However, larger diamonds of over 10 ct and fancy coloured stones are expected to become increasingly scarce, which will likely drive up their prices in the medium to long term. Demand for these stones remains relatively steady.

“In contrast, prices for smaller stones are unlikely to recover soon, largely due to ongoing competition from lab-grown diamonds. Alluvial diamond mining, characterised by a larger average stone size and a higher proportion of gem-quality diamonds, are expected to be the most profitable segment moving forward,” he posits.

De Meillon also points out that, within the marketing sphere, a small group of financially strong companies has emerged, capitalising on current market instability and the financial difficulties facing many producers.

“These companies are seeking long-term control by investing in mining rights and acquiring existing operations. They are also purchasing most of the available rough diamonds and providing financing to smaller buyers.

“The effect of these actions on tender prices is yet to be determined but has the potential to exclude the sought-after alluvial production from being exposed to the international market,” he speculates.