A request by Lesotho’s Mothae kimberlite mine to sell diamonds to its major owner and operator, the Australian-based Lucapa Diamond Company, presents a chance for pricing manipulation, warns Antwerp Belgium based researcher.
Hans Merket, researcher for Belgium-based research centre, International Peace Information Service, told MNN Centre for Investigative Journalism that, if the request is granted, it may leave the door open to undervaluation, by which the mine could avoid paying high taxes, dividends and royalties in Lesotho.
Lucapa acquired the Mothae Diamond Mine for USD9-million in 2017 after it was signed away to the Gupta family-linked company, the Tequesta Group, by the administration of former prime minister Thomas Thabane on the eve of 2015 elections.
Located in the Maluti Mountains of Lesotho, the mine is neighbour to the world highest per carat dollar mine, Letšeng Diamonds.
Lucapa runs Mothae and has been marketing and selling Mothae’s diamonds through tendering in Antwerp, Belgium. This is in line with the mine’s sales and marketing agreement with the Lesotho government.
But from time to time, the mine withdraws selected diamonds from the tender and gets permission from the Ministry of Mining to sell them through cutting and polishing “at a higher value”.
According to a recent statement by the Minister of Mining, Serialong Qoo, the Mothae Mine has asked the government for permission “to defer payment of royalties from April 2020 to March 2021 … to defer payment of ground rent for 2020 and arrears to be settled in 2021, and to identify alternative sales and marketing channel, while there is lockdown in Antwerp, Belgium.”
Qoo said the Ministry of Mining responded on May 28 2020, granting the requests for the deferment of royalty payments and allowing it to find other means of selling diamonds.
The second request was not approved, with Qoo saying Mothae was expected to continue paying ground rent to government.
However, the minister said the mine had responded with a new request, that it be allowed to “sell diamonds to Lucapa, the government’s 70 percent partner in Mothae, for five years without putting them out to tender.
But Merket warned that Mothae’s reference to “Antwerp lockdown” is not a very strong argument. “Antwerp is not in lockdown. Yes, the trading halls were temporarily shut down, but trading could continue in other parts of the bourse complexes. This would seem like a very permanent measure to deal with a temporary problem”.
“The risk of price manipulation is a common concern for the sector as a whole due to the subjectivity of diamond valuation. The best way to avoid this is through tenders as this ensures more competitive prices. A non-tendering process is per definition less market-conform and thus requires other, more complex, checks and balances,” Merket further stressed.
As this request was the first of its kind, the ministry decided to carry out due diligence and consult other interested parties, including the mine, before granting or rejecting it, so as to curtail possible harm to either party.
But Advocate Thabo Lerotholi, president of Maluti Community Development Forum (MCDF), a mouthpiece for the marginalised communities within the mining locations of Lesotho, raised a concern this week that his organisation has never been consulted.
“It is sad that MCDF playing a role of an oversight and indeed an observer in the Kimberly Process (a commitment to remove conflict diamonds from the global supply chain) is always sidelined by the Ministry of Mining.
“The issue of Mothae is heart-breaking and only confirms a series of many mistakes and blunders that Lesotho government continues to commit and never consults the communities that are directly affected,” Lerotholi said.
The MNN has learned that although Mothae’s request could expand the market for its diamonds amid Covid-19, if granted, it could also expose its precious stones to pricing manipulation by the multinational, Lucapa.
Pricing manipulation, also known as transfer mispricing, refers to trade between companies or departments of the same group at prices intended to manipulate markets or to deceive tax authorities.
MNN understands if Mothae was to negotiate with Lucapa, the outcome could be an artificially low price that would lower the mine’s profits and thus tax liability. Low profits would in turn mean lower dividends and royalties to the government of Lesotho.
A related local case is that of the Namakwa Diamonds incorporated in Bermuda, a British island territory listed by Oxfam as the world’s worst corporate tax haven.
Namakwa’s Lesotho subsidiary, Storm Mountain Diamonds, in Kao in the Botha Bothe district, has reportedly not paid dividends and royalties on its diamond sales to the government since the mine began full-scale operations from 2014 to 2019.
When Parliament’s Public Accounts Committee questioned the company last year, the committee’s chairperson, Selibe Mochoboroane, complained that “mining companies fund their operations by acquiring loans from their shareholders which they pay back at exorbitant interest rates, making the mines seem unprofitable and unable to pay dividends to the government”.
Speaking to MNN, the Commissioner of Mines, Pheello Tjatja said “the government is busy taking advice” on measures to ensure that diamond prices Mothae charges Lucapa are not lower than market rates.
But Tjatja ruled out any possibility of transfer pricing misuse by these two related companies, arguing that “movement of rough diamonds and their prices are tracked from one country to another”.
MNN has also learned that when Mothae made the request to be allowed to sell its diamonds elsewhere, Lucapa had already brokered a deal with an unnamed “high-end diamantaire” to sell some of its high-value diamonds from the mine for $505 per carat plus a 50% share of the margin on the future polished diamond sale.
According to the Australian Mining report, under this partnership, “Mothae will receive the rough price upfront with additional margins generated from sale of the diamonds after procurement and manufacturing costs have been accounted for. These additional margins will be shared equally between Mothae and the cutting and polishing partner”.
The multinational had already sold 3 693 carat diamonds from the Mothae mine through the same partnership. The Mining Review Africa reported the sales on April 14 this year, revealing that “3693 carats of Mothae diamonds [were] sold” through this partnership for $3.2 million.
Tjatja told MNN that the ministry knew about the diamonds.
“The manner in which they sell diamonds is always approved and this is provided by law. The diamonds are strictly controlled, even when they are exported, only government takes them out of the country.
“Our agreement stipulates that diamonds should be sold where there is most benefit for the shareholders, Lucapa and the government of Lesotho.”
In line with their sales and marketing agreement, Tjatja said diamonds should be sold through a tendering process. But from time to time, the mining companies ask for permission to sell certain diamonds cut and polished and not in their rough form. Tjatja said this is usually granted but tax is deducted separately from tendered diamonds.
“Three carats and above are sold individually but less than three carats are sold in parcels. If a diamond doesn’t get the value one would expect from a tender, it is withdrawn and sold after cutting and polishing at a higher value,” Tjatja added.
Lucapa’s managing director, Stephen Wetherall, was quoted by the Mining Review Africa report as saying that “the sale of diamonds into a cutting and polishing partnership in this environment provides Mothae with a level of price protection, in that [it] should receive additional margins from the onward sale of these diamonds”.
Wetherall is also the CEO of Mothae.
Asked to shed light on this partnership and how transfer mispricing would be avoided if their request is granted, Wetherall did not respond to MNN’s emails. This is despite a July 31 to August 18 email tracking showing 12 views from Perth Western Australia.
However, a Lucapa official who ignored requests to be identified said: “Off the record, kindly understand that these terms are the subject of confidential discussions with the Ministry of Mines.
“As such, Lucapa will be in a better position to respond publicly to your and any other stakeholders’ questions once the process with the Ministry has concluded”.
Although the negotiations between Lucapa and the Ministry of Mining are not concluded, the MNN’s interview with Tjatja hinted a very high likelihood that the multinational’s request to be exclusive buyer of Mothae diamonds will be granted.
The commissioner of mines, Tjatja, gave all the reasons why it should be granted and none on why it should not.
According to Tjatja, Lucapa’s request was not exactly based on closure of Antwerp but it was prompted by “the complete change in diamond marketing landscape as a result of Covid-19”.
“What we want to do is to adjust to the new changes and become relevant,” he emphasised.
He said restricted movement of people all over the world has changed the diamond landscape and negatively impacted on Antwerp where people buy from all over the world.
“Other countries producing diamonds did not close during lockdowns, many diamonds were produced and now producers have tonnes and tonnes of diamonds’ stockpile that they were not able to sell.
“Should those diamonds be put into the market, is this not going to flood the market and plummet prices leading to major losses by other mines and lead to complete closures? That is the risk we are facing. That is how the diamond marketing landscape changed altogether.
“Now we need to have connection to the customer. The miner wants to partner with diamond cutting and polishing who polish for specific customers having placed their orders. That is what we want to test as diamond marketing strategy with the types of diamonds we are producing,” Tjatja concluded.