July 3 (Bloomberg) -- As goat meat sizzled over glowing coals nearby, Daniel Sakanya held out a shiny green crystal the size of a AAA battery, an emerald worth hundreds of dollars.
Sitting with friends in the Bulangililo slum of the northern Zambian town of Kitwe, Sakanya explained that he pilfered the stone from a pile of ore at Gemfields Plc’s Kagem mine, the world’s biggest emerald operation, about 40 kilometers (25 miles) to the south. Police officers took a bribe to let him in, he said.
“There are a lot of people working there as illegal miners,” Sakanya, wearing a red t-shirt and a red and white cap, said through a translator, speaking in the Bemba language, last month as he and his colleagues prepared to depart for the mine. “It goes by luck; some days we can get nothing.”
The illegal emerald trade in Zambia, the third-biggest producer of the green gemstones, accounts for almost 40 percent of the southern African nation’s total output, Deputy Finance Minister Keith Mukata said in an interview in Lusaka, the capital. The theft cuts revenue for companies including Gemfields and weakens the country’s drive to reduce dependence on copper, which provides about 70 percent of exports.
Zambia produces as much as $200 million a year worth of emeralds, with its stones known for their dark color and often bluish hue, lagging behind Colombia and Brazil, according to Sean Gilbertson, executive director at London-based Gemfields. While it is difficult to know the size of the illegal trade, he estimates as much as $60 million worth of emeralds may be leaving Zambia illegally annually.
“It’s a very serious racket,” Mukata said. “It’s all shrouded in secrecy.”
The illegal miners collect broken lumps of emerald-bearing rock, loading them into sacks which they carry to makeshift camps at the Kafubu River, about a kilometer south-west of Kagem’s main pit. The miners use picks and shovels to break the rocks into smaller pieces, and then wash them in the river, plucking out the emeralds, Sakanya said.
“They will operate on the periphery of the pits but also come onto the mine dumps looking for emeralds that we might have missed, and we do miss them from time to time,” Gilbertson said.
Zambia’s government pays police, often accompanied by dogs, to patrol the Ndola Rural Emerald Restricted Area, which surrounds Kagem and other emerald mines. Elizabeth Kanjele, national police spokeswoman, declined to comment, referring queries to Mary Tembo, police commissioner for the Copperbelt region, who didn’t answer calls to her mobile phone.
Gemfields is employing Nepalese Gurkhas as guards, partly to make communication more difficult to stop collaboration between miners and security, Gilbertson said.
The global emerald market is a 1Oth of the size of the $14 billion uncut diamond business, Jeremy Wrathall, head of global natural resources in Europe for Investec Plc’s investment-banking and securities unit, said in a June 28 interview from London.
Gemfields estimates it lost as much as $17 million in potential revenue from emerald theft in the 12 months to June 30, 2012. The steady supply of illegal emeralds in Zambia “destroys our prices,” Gilbertson, a director at Kagem and Gemfields said in a speech in Lusaka on June 19. The company’s share price has fallen 42 percent over the last year in London to 21.625 pence.
He opposes the Zambian government’s ban on holding offshore emerald auctions, because local sales make it easier for foreign buyers to source gems from the country’s illegal market. Workers at the mines also collaborate with security officers to steal and smuggle the stones, Gilbertson said in an interview in Lusaka on June 19.
“We had a case some years ago with a gentleman who had been fishing on the lakes on our operation. He was freezing the fish and taking them to the local town to sell them,” Gilbertson said. “One of security officers decided to open up one of the frozen fish and found emeralds inside.”
Buyers of stolen emeralds usually bribe mine workers with mobile phones, laptop computers or even cars, according to Clever Kalolo, a rock driller at Kagem who has worked at the mine since 2004. He hasn’t taken part in the trade.
Workers extracting emeralds in the open pit swallow the stones when they see that a security camera is pointing in another direction, Kalolo said in a June 7 interview at his house in Kitwe’s Chimwemwe area. The gems are later passed to couriers known as “go-comes,” who take them to dealers.
Traders either smuggle the emeralds out the country or export them legally to buyers in the U.S., Bangkok, India and Hong Kong, Jean Claude Michelou, vice president at the International Colored Gemstone Association, said in a May 31 interview in Lusaka.
The country collected 16.8 million kwacha ($3.1 million) in royalties from the emerald sector last year, according to Joseph Nonde, an assistant director at the Zambia Revenue Authority. Kagem paid over 80 percent of this, he said in a copy of a presentation delivered on May 30. In addition to royalties, government collects income tax from mining companies.
In a bid to stem the illegal trade, the International Colored Gemstone Association is working with the United Nations to put in place a system for gems similar to the Kimberley Process in diamonds, Michelou said. The system will track and trace the provenance of gemstones, he said. The Kimberley Process, which came into force in 2003, is an organization that monitors the sale of diamonds mined in war zones.
“This is what our system is about: asking where it came from,” he said.
Countries involved in the initiative include Sri Lanka, Brazil and Colombia, while Zambia is still expected to join, and the project will take four years to to implement, he said.
A mine worker who gets paid $500 a month might sell two stolen uncut emeralds each the size of an adult’s small finger for the same amount as his paycheck, according to Julius Petsch, a fourth-generation German gem dealer.
“You see your old shoes. You have five children, school is $500,” he said in an interview in Lusaka. “You do not feel guilty if you’re improving your life. In all the gemstone mines in the world it’s the same problem.”
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