Not many investors are aware of South Africa's fledgling mineral beneficiation industry, but given how companies like African Romance are set to make a killing, they would do well to brush up on these opportunities.
 
At its simplest, beneficiation is a fancy name for ‘value-adding’, taking primary materials such as gold or diamonds and using them to make a more finished product which can be sold for more money.

So, rather than selling gold to export markets such as China, which simply reworks the raw material into jewellery, the push for ‘local beneficiation’ means these value-adding processes ought to be done in SA.

There is good reason for the Department of Minerals and Energy (DME) to be so eagerly punting 'beneficiation'. Consider diamonds: as it stands, South Africa mines and sells 12-million carats of diamonds a year, yet only 125 000 carats of this are polished and cut in the country – less than 1% of the total.

This is a scenario that repeats itself with commodities such as gold or platinum which are mined in Africa then shipped overseas in their rough form to be reworked. But if this value-adding process were to be done locally, not only could beneficiators demand higher prices, it would also create skilled jobs.

But just how easy is to invest in beneficiation projects?

The short answer is, easier than ever before due to a raft of new rules, including the 2004 Mining Charter, which provided 'empowerment points' to miners for their beneficiation projects.

On the diamonds side, the Diamonds Amendment Act of 2005 saw a State Diamond Trader created  to buy rough stones from miners and sell them to local cutters and polishers. Abbey Chikane is CEO of this State Diamond Trader, and he told TradeInvestSA that since he opened his doors in September, there's been ‘lots of interest from all sides’.

‘We've now managed to set-up our operations, secured funding and now entered into agreements with suppliers and, most importantly, our clients,’ he says.

Essentially, miners offer 10% of their rough diamonds to Chikane's company, who then sell these diamonds to local cutters and polishers.

‘There's been a lot of excitement [from beneficiators]. When we advertised in Business Day inviting the public to become our clients, we received more than 150 applications,’ he says. Although the majority of Chikane's buyers are existing cutters and polishers, he says  ‘we're open to current and new players’.

The experience of a company like African Romance is also instructive.

The company was started by Mohseen Moosa, who chaired Parliament's Economic Affairs committee from 1994 in Nelson Mandela's government. Moosa says that before opening its doors, African Romance travelled to various jewellery fairs and exhibitions around the world.

‘One of the first things we discovered when we went to the Basel Trade Fair in Switzerland was that of about 2 500 brands being exhibited, not a single one was African. This was despite the fact that a large part of the gold, diamonds and platinum used in products was from Africa,’ he says.

Why is this?

‘Well, I really can't understand it,’ says Moosa. ‘I just think that perhaps there hasn't really been the desire [to beneficiate minerals we mine]. In our history, we've always had the attitude that Africans are only good for digging holes, and we leave the rest to cleverer people in cleverer countries,’ he says.

Moosa says his company wants to prove that Africans have the capacity to make a finished product that is better than foreign-made products.

African Romance buys diamonds from various sources; these are worked on by a crack team of about 50 cutters and polishers (who, on average, each have 15 years experience). These diamonds are sold to either the diamond wholesale market (such as jewellers), the loose diamond retail or tourism market, or to consumers as finished jewellery.

Moosa says African Romance is targeting baseline sales of R60m in its first year, and has the capacity to polish 3 500 carats of diamonds a month. ‘If we brand ourselves properly, we could build this into a business with revenue of around R200-million to R300-million a year,’ he says.

‘We are only of only two or three companies that will give you a 100% guarantee that the diamonds we sell as conflict-free, are mined and made in an environmentally-friendly manner with fair labour practices, and in conjunction with local communities,’ he says.

More incentives likely

So how easy was it to set-up African Romance? Could other investors hope to do a similar thing to exploit the beneficiation fad?

Says Moosa: ‘It was one of the most difficult things I've done, because we had to start from scratch ... but we hope other smaller businesses will be able to look at our model and say, here's a set of principles, maybe we can use this’.

The government could also do more to incentivise would-be beneficiation companies.

‘Capital inputs are quite high and technology is expensive,’ he says. ‘Government will have to play a stronger role. Tax breaks might be one way, they could also assist with getting the technology here, help with providing skills and a route to market’.

The DME's ‘beneficiation economics directorate’, is looking at these sort  of incentives right now. Importantly, for entrepreneurs, this department also there to ‘advise’ companies looking to break into this niche.

Diamonds might be where the early action is, but all the major commodities mined in this country are fair game. The most recent draft of the Mining Royalties Bill provides extra incentives for all miners to promote beneficiation – which could help promote beneficiation of minerals like uranium.

Moosa says that even if there were 100 other companies doing exactly what African Romance was doing, they still wouldn't be anywhere close to polishing all the diamonds taken out of the ground. ‘There's certainly lots of room for other players, and lots of room for growth,’ he says.

Already, the government's focus on beneficiation has paid dividends. Between 2003 and 2005, for example, there was a 48% jump in the export levels of beneficiated products, from US$3.7-billion to US$5.5-billionn – mainly chromium, aluminium and manganese alloys.

Clearly this illustrates the extent to which 'beneficiated products' are finding a market. Investors seeking a burgeoning industry set for rapid takeoff could do a lot worse.