London Calling asks: is Rio Tinto "bidding fair" by Aboriginal landowners?

Published by MAC on 2017-07-30
Source: New York Times, ABC

How Much for That Fancy Red Diamond? It's Kind of a Secret

By Micah Maidenberg

New York Times

26 July 2017

When the mining company Rio Tinto shows its latest batch of rare naturally colored diamonds  stones with hues of pink, red and even deep-ray violet”, executives are delighted to go on about their beauty and scarcity.

But details about pricing? That is when the lips draw shut.

"It's quite confidential", said a laughing Arnaud Soirat, the chief executive of Rio Tinto's copper and diamond group.

Welcome to the exclusive world of the colored diamond trade, a market where the buyer pool is slim, the supply is constricted and a carat can fetch $1 million or more.

On Wednesday, Rio Tinto came to Manhattan to introduce its latest and best colored diamonds, in the start of a tour that will include a stop in Hong Kong and another one in New York. The company's latest cache, 58 stones, sparkled in glass cases on the 21st floor of a Chelsea skyscraper. With names like the Argyle Liberte and Argyle Isla, the total weight of all the stones was 49.39 carats, suggesting a collective value in the tens of millions  - even though they all could fit in a pants pocket.

The company brings such diamonds to market once a year, unearthing the stones from its Argyle mine in Western Australia, where it might sift through 100 tons of a rock called kimberlite to collect a single carat.

As it showcases its wares, Rio Tinto invites a select few collectors, wealthy people, dealers and others to submit sealed bids for the stones in the batch. It is a selling process that has few peers in opaqueness.

Besides Rio Tinto, no one knows how much bidders offer for the stones, and the company does not report how much the winning bidders pay. Potential buyers are careful about sharing too much information. One such buyer, David Shara, said he would chase after the star of this year's lot, a diamond called the Argyle Everglow, but he declined to reveal his offer.

"I'm going to bid way too much", he said."If I tell you, somebody else is going to hear, and they'll bid a dollar more."

Mr. Shara, 42, the owner of Optimum Diamonds in New York, has been trading in naturally colored diamonds for about 15 years. He describes himself as a "treasure hunter" but also a dealer and collector. His particular focus is on the "vivid and deep- colored diamonds, a reference to a grading scale that starts at "faint" and ends with "fancy vivid".

Standing in front of the Argyle Everglow, a fancy red diamond weighing in at 2.11 carats, Mr. Shara was ebullient. In the Argyle mine's 33-year history, just 23 other fancy reds, a designation of the depth of its color, have come out of the ground.

"It's the ultimate prize," he said. "It's literally the ultimate prize."

Olya Linde, a partner in the Moscow office of the consultants Bain & Company, said colored diamonds were "governed by a different logic" from the more typical clear diamonds. The market for them, she said, is more similar to how fine art is bought and sold.

There is some price information about naturally colored diamonds, much of it emerging at auctions organized by houses like Sotheby's and Christie's.

The record auction price for a fancy red diamond is $5 million, paid three years ago in Hong Kong, according to materials distributed by Rio Tinto. That transaction also set the record for the per-carat price, $2.4 million.

David Rosenberg, the owner of a namesake diamond and jewelry company in Boca Raton, Fla., estimated that a one-carat "vivid pink" diamond that was round in shape and had flawless clarity would fetch about $800,000 on the wholesale market. That is more than double the price five years ago.

"These stones are definitely being spotted and people are noticing them," said Mr. Rosenberg, who plans to participate in Rio Tinto's current offer.
Their supply is expected to further diminish. Rio Tinto will keep the Argyle mine in operation until 2021. When it closes, naturally colored diamonds will probably become even more scarce: The mine produces 90 percent of naturally colored pink diamonds in the world, according to Mr. Soirat, the Rio Tinto executive.

Mr. Soirat said prices for the colored diamonds were rising by double-digit percentages in recent years. But asked if he expected further price increases upon the closing of the Argyle, Mr. Soirat kept his poker face.

"It's a market " he said, "that follows the rules of demand and supply."

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Diamonds are not forever: Indigenous communities grapple with end of the mining boom

By freelance journalist Michael West and Suzanne Smith

ABC

27 June 2017

As Australia's resources boom wanes, several Indigenous communities that were once promised prosperity have been left grappling with a legacy of endemic poverty and questions about how mining money has been spent.

For the traditional land owners around the township of Kununurra in the remote north of Western Australia, diamonds have not been their best friends.

The nearby Argyle diamond mine is three years from closure, and a royalties fund designed to ensure the community's future is severely depleted.

Nestled among the scenic ranges of the Kimberley, Kununurra is blessed by an abundance of fresh water, the arable plains of the Ord River to the north-west and the Rio Tinto diamond mine to the south.

The Indigenous Land Use Agreement that traditional owners negotiated with Argyle between 2003 and 2005 was held up as an example of best practice across the country.

Now, however, with revenue from the mine running dry and Rio facing the impending high costs of closing the mine, the outlook is bleak.

Where once the Argyle deals had led to a dramatic increase in Indigenous employment, opportunity, and a sense of self-determination for the people of the north-east Kimberley, now there is despair.

Despite millions of dollars a year from Argyle diamonds flowing to seven local family groups, or Dawangs, via a complex web of companies and trusts, the community is riven by poverty, poor education, alcoholism and one of the highest teen suicide rates in the country.
A troubled legacy

Local Ted Hall says the diamond wealth has not helped the Gija and Mirriuwung communities surrounding Kununurra, but has caused fights and havoc amongst family members.

Mr Hall, a former director and chair of the Traditional Owners Corporation, Gelganyem, says much of the wealth from the mine has been frittered away on failed projects and personal spending.

"You look at the impact of when royalty money started coming into the communities, that cash payment created a monster — that monster is greed and power," he said.

"Because it's a democratic system now: majority vote gets you into the council. We've had family members basically cutting each other off at the knee to get top doggy spot on the council, to control the council, to control the community, to control the wealth. He who holds the power ... benefits."

In the beginning however, there was great promise. Ciaran O'Faircheallaigh, professor of politics and public policy at Griffith University in Queensland, brokered the deal for the Indigenous side.

"There was a dramatic increase in the extent of Aboriginal employment from about 7 per cent or 8 per cent to close to 25 per cent," he said.

This created major opportunities, both for individuals but also for their families and their communities. The revenue that came to traditional owners also had major impact in the early years.

Perhaps, most important of all, was the greater sense of control that the traditional owners had. For the first time, they were able to decide where the company could and could not explore. This had never happened before.

While the deal helped secure more than 100 apprenticeships at the mine, and investment in some Indigenous businesses, much of the economic potential has been lost.

So where has the money gone?

It appears the community has been hit by two factors — declining profitability from the mine, and issues over the management of the fund.

According to Rio Tinto's Sustainable Development Report for the Argyle Diamond Mine, in the four years to 2016 some $25 million in royalties was paid to the traditional owners — seven extended families comprising about 1,500 people, as well as the two Indigenous trusts, Gelganyem and Kilkayi.

These trusts received the bulk of the money.

There are a number of anomalies in the financial statements for the two local trusts that receive Argyle funding. What is clear is that during the past five years, there has been a serious decline in reporting standards.

Where once there was ample spending on community projects, disclosed in detail, there is now almost none, and poor disclosure. Initially significant income flowed from community projects — now there is almost none.

Besides the receding profits from the mine, a critical turning point in the fortunes of the Kimberley community seems to have come in 2013 when Rio Tinto agreed to modify the Kilkayi Trust Deed to allow the beneficiaries to spend on "items of personal nature".

Rio Tinto agreed to the trust deed changes after a flood devastated one community, and following several years of low profits or losses from the mine and therefore poor returns for the local communities.

It is not known whether the Gelganyem Trust Deed was also amended. The deeds are unavailable and the communities have declined to comment for this story. But we know almost half of the Kilkayi income from the mine was spent on personal items in 2013 — money which had earlier been earmarked for specific projects.

According to the Gelganyem annual report for 2013/2014, some 46 per cent of the Kilkayi expenditure in that year went to "items of a personal nature".

"Changes to the schedule have significantly influenced beneficiaries' spending by allowing purchase of food, supplies, white goods and furniture, clothing, bus and air tickets," the report noted.

While almost half of the Kilkayi money was spent that year on these "items of a personal nature", just 1 per cent of funds was spent on employment and training, 5 per cent on health, 6 per cent on education and 9 per cent on business development.

In the ensuing years, following the amendments to the trust deed, the financial statements of the Gelganyem Trust mirror the decline of Kununurra and the community's growing social unrest.

According to the 2016 financial statements for Gelganyem Ltd which are filed with the charities regulator, Australian Charities and Not-for-profits Commission (ACNC), not much is being done now with the revenue from the Arygle Diamond Mine. Increasingly less has been done in each successive year as the revenue from the mine runs down.

While administration expenses almost doubled to $1.2 million last year, and employee expenses fell from $2 million to $1.4 million, operating expenses ebbed from $207,000 to just $43,000 and expenditure on projects from $304,000 to $13,000.

Matching this decline in money spent on projects was the dramatic fall in income from projects such as the annual Barramundi Dreaming concert, the creation story of the people of the region. Over the past two years, income from projects dwindled from $696,000 to $215,000.

As a director of the trusts, Ted Hall signed off on these changes, but now regrets the decision and wishes he had his time over again.

"Well, first of all I wouldn't give cash payment out to the people, I would actually invest for the future of the people," he said.

"We should have been investing in purchases of land. We should have been purchasing businesses ... [to] develop and grow our businesses. Giving us money is just like throwing to the rubbish.

"So we have to ask ourselves, what exactly have the royalty payments done for us? Nothing ... we haven't been able to capitalise on it."

Professor O'Faircheallaigh says it is important to remember these are severely impoverished communities.

"These are people that often have very serious challenges in surviving from day-to-day. It's difficult for them to see the sense of putting money aside for later, for 10 years or 20 years down the track when they have some very serious problems that they're trying to deal with right now," he said.

"On the other hand, if all of the money is used in that way, there is a real problem, because when the income from mining ends, what do people do? There's always a need to balance those immediate demands.

"There are also issues about whether or not you should simply hand out goods in that way. I mean, Noel Pearson, for example, would say that it's simply another form of welfare if you do that. There may be an argument for having some contribution from people towards those sources of personal benefits."

The end of the boom

The deteriorating financial position of the traditional owner groups coincides with falling income from the diamond mine.

A spokesman for Rio Tinto said: "The deed was changed to allow for essential items to be purchased as the more general programs being funded were not providing the Traditional Owners with the equipment they needed to improve their lives... changing the deed allowed for purchase orders to be created for the Traditional Owners obtain essential items (whitegoods etc). There was no money transferred."

"The mine's financial performance was impacted by the global financial crisis, that resulted in the lack of payments. We advise the trust of our financial performance every year but we did and do a formal review every three years."

Despite the introduction of a smoothing deed in 2013, whose purpose is to top up and regulate payments to the two Indigenous trusts, income from the mine is running out. In the latest accounts, it fell off a cliff, down from $6 million to $1.6 million.

A Rio Tinto spokesman said the smoothing deed was introduced "to provide consistent payments".

"The financial performance of most mines linked to global commodity markets will be up and down; the smoothing deed was designed to compensate for that," he said.

Unfortunately for both parties there was a collapse in the world diamond market when the monopoly of dominant South African diamond marketer De Beers was broken a few years ago. De Beers had kept prices artificially high.

The ABC understands Rio Tinto dramatically reduced its forward estimates for the mine's earning capacity and that is why the dividend to the two Indigenous trusts plummeted in 2016.

"Argyle has faced challenging market conditions and this was reflected in the lower EBITDA payments made in 2016 under the Participation Agreement," a Rio Tinto spokesman said.

"Despite these economic challenges, Argyle has continued to support emerging Aboriginal businesses such as cultural tourism and to offer contracts to Aboriginal businesses to provide services at the mine."

Problems with the model

Once hailed as a model of mining company deals with traditional owners, there are increasing concerns the Gelganyem and Kilkayi Trust models have not served Indigenous people well.

Professor O'Faircheallaigh says the system is now wrong, unaccountable, and failing to deliver the requisite legal and technical documents upwards to regulators such as the ACNC.

"It does not focus on providing information downwards to the constituencies of these associations in ways that makes sense to them. If I can use a specific case to illustrate this, a couple of years ago, the Groote Eylandt Aboriginal Trust got into some serious financial difficulties.

"How is somebody in Groote Eylandt, whose second or third language is English, [someone who] may not speak English fluently at all, supposed to make sense of an auditor's report?

"What we need to do is to find ways of making information available to the constituencies of these associations in a way that makes sense to them.

"That will then allow then to put immediate and timely pressure on, if there's an indication that something is going wrong."

Rio Tinto's arrangement with Gelganyem and Kilkayi is for payments to be made on a percentage of gross profit from the Argyle mine, rather than revenue.

Profit, unlike revenue, can be manipulated and one director of the trusts has claimed Rio Tinto has manipulated profits. The royalties formula is a 2.2 per cent share of earnings before interest, tax, depreciation and amortisation (EBITDA).

There is also a fixed payment. During the mine's more profitable years the payments peaked at $8 million.

Contacted for this story, lawyers who act for Indigenous groups in negotiations with mining companies are critical of the Argyle arrangements. One cited Rio Tinto's subsequent deals with local groups in the Pilbara which have been struck on a revenue formula — rather than gross profits — and therefore deliver more reliable income.

The Pilbara deals are also tied more closely to projects rather than cash hand-outs, which are susceptible to abuse.

Where to now for Kununurra?

For the Kimberley communities this chain of events has one final sting in the tail — the collapse in the sustainability fund, the future fund for communities once the mine closes in 2021.

It had originally been envisaged that the income from Argyle would leave the sustainability fund with $34 million when the mine closed. On the latest available figures, the fund has just shy of $13 million, which would require the impossible, $5 million a year, to reach the sustainability target.

Professor O'Faircheallaigh says the troubles in Kununurra hold a worrying lesson for the rest of the country.

"I think mainstream Australia should look at itself very carefully and very critically and ask, how effectively did [we] use the huge amounts of iron ore royalties that flowed in over a period of six or seven years?

"You could be very critical of Australia in terms of what a good or bad job it did in managing those revenues.

"Most of it went on middle-class welfare. Most of it went on the middle-class equivalent of giving Aboriginal people in northern Australia a fridge or a washing machine. That's where it went."

In Kununurra, Ted Hall describes conditions as "third world".

"Houses are falling to pieces there, we don't have landscaping — and you've gotta ask the question, where is all that royalty money coming, where is it going?" he said.

"I asked the questions and for my benefit I got basically threatened with violence. I was told by the councillors to get off the community.

"If that royalty money was invested in developing businesses, developing the community, not getting cash out, it might have had a different impact, but right now, brother, I would say it does not work for us."

The ABC contacted the Gelganyem Trust several times over a period of 12 weeks for on the record comment and interviews, but they declined to be interviewed.

Michael West is an investigative journalist and an associate professor at Sydney University — his work can be found at www.michaelwest.com.au.