De Beers, gov’t talks could hinge on Jwaneng
Mbongeni Mguni | Monday March 6, 2023 06:00
Industry insiders who spoke to Mmegi this week said the mammoth expansion planned for Jwaneng would become the deciding factor in the final terms of the agreement the two partners are hammering out ahead of their agreed June deadline.
Since 2018, government and De Beers have been negotiating a new agreement governing sales from Debswana, the 50/50 joint venture the two partners established in 1969 which has grown to become the world’s largest rough diamond producer by value. Recently, it was revealed that the talks also include renewal of the mining leases for Jwaneng, Orapa, Damtshaa and Letlhakane which all expire in 2029.
While the talks and their eventual terms are a closely guarded secret, tensions in the negotiations recently boiled over into the public space when President Mokgweetsi Masisi made remarks interpreted as a being desire for a greater revenue share from the 54-year old partnership with De Beers.
Botswana receives 80 thebe of each one pula generated at Debswana and through the state owned diamond trader, Okavango Diamond Company, is entitled to purchase up to 25% of Debswana. However, local technocrats believe greater value can be extracted downstream, in areas such as polished diamonds and jewellery, while more revenues could be unlocked in alternative sales arrangements. One of the arrangements cited recently is where Belgian diamond start-up, HB Antwerp, is purchasing diamonds from Lucara’s Karowe Mine based on their value as polished stones, rather than the standard practice of paying for rough product.
Taking advantage of such opportunities in the downstream or securing alternative sales arrangements with other players would likely involve securing a bigger cut from Debswana, above the 25%.
Industry insiders who spoke to Mmegi this week said negotiations over the sales deal and the mining lease renewal would predominantly feature how to pay for the underground expansion at Jwaneng Mine, which represents the future of diamond mining for government and the biggest investment in supply De Beers is currently pursuing.
The expansion will create the world’s largest underground diamond involving 360 kilometres of tunnels which will bring up nine million carats to the surface, starting in 2034 and going up to at least 2054.
“De Beers has been searching the world for diamonds over the decades and Orapa or Jwaneng sized discoveries are rare,” an industry analyst closely following the latest developments told Mmegi this week.
“Even when it goes into its underground era, Jwaneng alone will produce more than any other De Beers’ mines outside Botswana, so it’s obviously very key to any discussions going on now.
“For the government, there is no other partner with pockets as deep for the expansion, or the technology required, or the marketing strength to create demand for diamonds as De Beers.
“The terms of the new sales deal and the renewal of the mining licences will be influenced by the future of Jwaneng Mine.”
Bruce Cleaver, who became De Beers co-chair on February 20, after seven years as CEO, told Mmegi that “both sides” were excited about moving ahead with Jwaneng’s expansion.
“Obviously there are things that I can’t say when they are still subject to discussions and confidentiality but it’s fair to say the entire Debswana board, all of us from both sides, are very, very focused on the future of Jwaneng and Orapa, and at Jwaneng that will be an underground,” he said on Monday.
“The various studies going into how we do it, are still being completed and in the mining world, we have to be very careful about the work we do leading up to formal approval, because these are big and expensive projects.
“It will come up for approval in the normal way and I have no doubt it will be approved at the time.”
In recent years, De Beers has directly or indirectly carried the lion’s share of the costs of major expansions at Debswana such as Cut 8, with a budget of P24 billion and Cut 9, which is ongoing with a budget of P16 billion. Government’s contribution in previous expansions has been by way of forfeiting dividend payouts.
Cleaver, who was involved in the 2011 negotiations that birthed the sales deal that expires in June, said he is supremely confident that the two partners will reach a mutually beneficial arrangement.
“The teams’ relationships are very good, very cordial and very professional and I have absolutely no doubt that we will end up with a deal that makes sense for government, for Botswana and for De Beers.
“We’ve been in a marriage for a long time and we are going to continue being in a marriage for a long time.”
For his part, President Masisi, struck a slightly more conciliatory tone in remarks made earlier this week in the United States, where he is engaging investors in Texas.
“As with all agreements, there’s a time at which it comes to an end and an opportunity avails itself for a renewal,” he said. “We are hopefully at the tail-end of negotiations for the renewal of the agreement, but in renewing it we both learnt lessons. “De Beers have learnt lessons and we have learnt lessons and those lessons we take to the negotiations.
“It is our earnest hope that the agreement that will come, will be an outcome of negotiations and signed off.”
Besides looking at who will carry what in expanding Jwaneng Mine, the teams from both De Beers and government working on the terms of the sales agreement are also closely studying the numbers.
De Beers recently published its 2022 financials showing topline revenue of $6.62 billion from the sale of just over 30 million carats. Over the same period, the state diamond trader, Okavango Diamond Company, announced topline revenues of $1.1 billion from the sale of “just under six million carats,” its managing director, Mmetla Masire, told Mmegi recently.
“The performance from ODC was from their allocation of a percentage of Debswana’s production, but it has given an indication of the room available for more value accretion for Botswana,” insiders told Mmegi.
Figures seen by Mmegi, meanwhile, suggest that Botswana’s earnings from Debswana in 2022 reached $2.6 billion, compared to De Beers’ own total core earnings of $1.4 billion. Botswana’s earnings from Debswana comprise taxes, royalties and dividends. Government also received $200 million from the 15% stake its holds in De Beers, the documents suggest.
In between the numbers, analysts say, are many variables and values unknown to anyone outside the borders of the closely-guarded sales deal.
Analysts told Mmegi that even granting the ODC a bigger Debswana stake could come with complications.
“De Beers success in the industry has been through creating a scarcity of rough diamonds in the market, branding the stones enduring uniqueness, pumping billions of dollars into that storytelling and then controlling the entire value chain ‘from mine to mistress’.
“Having another independent “mine” as the ODC would essentially be, churning out similar quality Botswana stones, with similar branding and story-telling but an independent selling method, would disrupt the price control De Beers has been enjoying.
“It could also flatten prices for rough diamonds in general. Imagine, De Beers strictly managing supply for its sightholders, while ODC holds frequent open auctions and the impact that will have on supply and prices in the market.”
Speaking this week, Cleaver said De Beers’ contribution to Botswana went beyond the current investment in Debswana.
“We are 50/50 shareholders in the Diamond Trading Company Botswana and that’s also fiscally important to both parties. “In the De Be Global Sightholder Sales we bring diamonds from all over the world here, aggregate them here and mix them here and bring global clients here, not to buy Botswana diamonds, but all of our diamonds. “That’s a significant contribution.
“Government is also a proud shareholder of 15% of De Beers itself and two government directors sit on our board,” he said.
One of the biggest contributions coming out of the partnership with government, however, is the growth of the cutting and polishing industry in the country, starting from six about 10 years ago, to the current 31. The factories relocated from all over the world to Botswana based on the promise of supply from the De Beers platform and the pledge by government of support and incentives under the Diamond Hub’s aegis. Employment in the cutting and polishing firms has hovered above 3,000 although citizens have frequently complained of working conditions and remuneration levels.
Cleaver declined to directly answer questions on whether the diamond group has made contingency plans in case its current levels of supply from Debswana are in anyway impacted by the negotiations.
“We have mines all over the world, not just in Botswana,” he told Mmegi. “We are doing a big expansion in Venetia in South Africa and we have a big mine in Canada and mines in Namibia. “We do have supply elsewhere, but the only way for me to answer that question is to say I’m very confident that we will come to a deal that is sensible for all parties and that all parties will be pleased with that.
“That’s what I’m focussed on and that’s what the team is focused on.” he added.