STORM Mountain Diamonds (SMD), the operators of Kao Mine in Butha-Buthe say that despite their failure to pay dividends, the mine has paid at least M600 million to the government since the mine began full-scale operations in 2014.
The M600 million is for royalties from the sale of diamonds recovered at the mine, mining lease payments, the withholding tax and Pay As You Earn (PAYE) which is deducted from employees’ salaries.
SMD officials said this in a recent statement to the Selibe Mochoboroane-led Public Accounts Committee (PAC).
This followed the mining company’s Tuesday appearance before the PAC where they were taken to task for failing to pay dividends and royalties for the diamond sales to the government since the mine began full-scale operations in 2014.
SMD is a subsidiary of Namakwa Diamonds which is the major shareholder of Kao Mine with 75 percent shareholding. The government owns the remaining 25 percent shares.
Mr Mochoboroane said that SMD had not paid any dividends to the government since 2014.
He said the mining companies “have played the not-profitable card” to avoid declaring dividends to the government.
“We have discovered that mining companies fund their operations by acquiring loans from their shareholders which they pay back with exorbitant interest rates, making the mines seem unprofitable and unable to pay dividends to the government,” Mr Mochoboroane said.
“This means that the shareholders are borrowing from themselves and are paying back the loans to themselves leaving the government without any dividends.
“Our people are frustrated that their natural resources are taken away and they do not benefit from them,” he said, adding that the company should cease its operations if they were not making any profits as they claimed.
Namakwa Diamonds Chief Executive Officer Robert Cowley attributed the failure to pay dividends to the mine’s inability to make enough profits on its diamond sales.
Mr Cowley said they were only able to service a M1 billion loan that they got from the biggest shareholder, Namakwa Diamonds Limited adding that they could only start paying dividends in three to four years when the loan was fully repaid.
And in a statement submitted to the PAC, the SMD management said even though the mine was not yet in a position to pay dividends, it was paying other dues which directly benefitted the government.
“SMD has to date paid to the government of Lesotho, royalties amounting to M330, 7 million; made mining lease payments of M10, 3 million; withholding tax payments of M151, 6 million, and PAYE on the salaries of employees of M117, 4 million. The total direct benefit to the government amounts to M610, 2 million,” SMD said in the statement.
The SMD further said that its predecessor, Kao Diamonds Mine, failed to any royalties and owed its creditors to the tune of approximately M40 million with the mine managing to export the total production of just over 7000 carats in three years which the management claim was less than half of SMD’s monthly production.
According to the SMD, the mine’ current viability was as a result of vigorous capital investment in the project, to the tune of over M1 billion.
“This success has not come by accident. The Kao kimberlite deposit remains the same marginal ore body that it has always been. It has been through prudent management of expenditure on the one hand, and increasing the economies of scale on the other, that the mine has managed to become a viable business.
“Both the cost management and the increase in economies of scale could only have been achieved through substantial capital investment into the business. The main capital outlays have been to firstly increase the production volumes from the onset and then to increase the production output in 2016. A further capital outlay was to fund the extension of the national power grid from Ha-Lejone (at Katse) as a major cost saving initiative. This cost M112 million. The total capital investment amounted to over M1,101 billion,” the SMD statement said.
In the statement, the SMD management said they would have been forced to close down operations if they had acquired loan from elsewhere other than their major shareholder as the mine had defaulted on the loan repayment due to production and high costs issues.
The statement added that during the business hardships, the current SMD investors (Namakwa Diamonds) was able to extend the loan repayments, a benefit they might not have gotten from an institutional investor.
“In 2012 and 2013 there were periods that the mine struggled to pay its creditors due to production issues and high costs. If SMD had been funded by an institutional investor they would almost certainly have foreclosed on the loans during this period. SMD’s investor (Namakwa Diamonds) has time and time again extended the date of loan repayments on the loans so that SMD repays as and when it has the finances to do so. This flexibility has enabled SMD to survive through difficult periods.
The SMD management further said while the mine intended to invest more in their operations, they still anticipated more losses as increased production did not necessarily translate into good returns.
“The fluctuations in the diamond prices are considerable and when the markets are down then SMD can quickly become loss-making despite good production. January 2019 was a loss-making month due to this factor as the diamond price achieved at the recent sale resulted in an average price of USD252 per carat against the targeted USD390 per carat. Production costs at SMD are going to rise in the next few years due to increased waste mining necessitated by the mine plan.
“SMD will continue to require stay-in-business capital. While parts of this capital can be funded from reserves, large capital outlays will require investor funding. In seven years’ time, the SMD will require significant capital to relocate its plant,” SMD said.
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