Cut diamond taxes for future gain

The type of tax regime that is currently in place for Namibia’s diamond sector was appropriate during the time when it was easy to mine for diamonds, however, most land deposits have now been depleted and mining has become costly, says Kennedy Hamutenya, diamond commissioner at the Ministry of Mines and Energy and Namdeb director.
“Most of our land deposits have now been depleted and we are now working on remote satellite deposits, some of which are costly to mine because of the depth at which the deposits are and the capital needed to mine them. In the old days one could pick up diamonds from the surface of the desert sands but we no longer have that privilege. We have gone back and treated some of the tailings dumps and some still remain to be worked on.
“There are still a number of places onshore where we can mine out remaining diamonds but those projects are marginal and unviable at the current tax levels. We would leave those deposits behind unless the tax regime is reduced to make their exploitation much more attractive,” said Hamutenya.
The diamond mining company currently pays 55% tax on profits and 10% royalty on turnover. The mining company requested last year that government lightens its tax burden on Namdeb stating that the company will not be able to attract investment needed to extend the mine’s life beyond 2020.
Hamutenya says this request is justified and that investors will not put funds in a project that is losing money. “There are still a number of places onshore where we can mine out remaining diamonds but those projects are marginal and unviable at the current tax levels. We would leave those deposits behind unless the tax regime is reduced to make their exploitation much more attractive. Otherwise they would remain sterilised in the ground and it would be much more difficult to return there in the future because we would have broken down the treatment plants and rehabilitated the area. So it makes sense to mine them now at tax rates that enable us to make a profit and pay taxes and royalties – albeit at reduced rates to the state coffers,” he told the Economist.
Hamutenya added that “massive investment” is also needed in offshore mining as the diamonds would be extracted using tools and equipment that are yet to be tested and properly developed.
“This requires massive investment in research and technology as well as prospecting and sampling to delineate those deposits and develop mine plans for the future. A reduction in taxes would enable Namdeb to invest in this future prospects. This would enable the company to extend the life of the mine to the year 2050 and beyond. At current tax rates, we would be looking at closing down the mines sooner - around 2020. It is really a choice between short term gain with long term pain, versus short term sacrifice and investment resulting in long term gains and benefits for all stakeholders and shareholders,” he said. No decision has been made yet regarding Namdeb’s request for a reduction in taxes, however, a Cabinet Committee has been appointed which is currently reviewing the tax regime for the mining industry.
Diamond price increases may ease as a result of global economic uncertainties over the short to medium term, says Romè Mostert, an analyst at Simonis Storm.
Mostert said that demand seems fairly strong and is at normalised levels from a retail perspective, however, a liquidity problem may hamper sales of rough diamonds as companies on the value-chain are struggling to obtain US dollar funding due to recent downgrades of Indian and European banks. “In Namibia the Elizabeth Bay operations are expected to recommence production in 2012, however the production increase will be partially offset by the cessation of mining in the Pocket Beaches areas. Forecasts are that production will increase to 1.6 million carats in 2012, 1 million carats from the marine operations and 600 000 carats from the land operations. However the diamonds from Elizabeth Bay are generally smaller and achieve a lower average price, thus the value of diamonds mined is expected to be only slightly higher,” Mostert said.
Hamutenya expressed optimism over the outlook for the diamond industry stating that from a production perspective, the company would do much better than last year.
“... last year the company’s production was hard hit by a number of developments that together made it difficult to mine up to its full capacity - the strike, the collapse of the seawall at Mining Area I and a breakdown of equipment on one of our most productive mining vessels. We are cautiously optimistic that none of those undesirable events would come back to haunt us in 2012 and that we would therefore be able to mine to our full capacity. But there are other elements that are critical success factors such as the market price of diamonds as well as the prevailing exchange rate,” said Hamutenya.