To De Beers or not to De Beers Part 2: An investment analyst perspective
Mphoeng Mphoeng | Tuesday November 18, 2025 08:37
With Part 1 of the article having run last week, below are the remaining major factors that in these kinds of instances, an investment analyst would consider for any deal as they prepare a motivation to their investment committee:
Regulatory, licensing, and contract risk: The long-term mining licences and sales agreements (with Debswana) have recently been extended/renegotiated through to 2054. Other agreements with other countries would also need to be evaluated to see the risk they pose. It would be prudent to assume that if any of the countries feel the change in ownership is not favorable for them, they might want to exit these agreements (adverse material change clauses could likely be triggered) and these would affect all contracts De Beers have with miners, suppliers and potentially sight holders. Botswana would have to do a due diligence and assess this risk and what that risk implies to future revenues and what the company would look like. Other issues could be if there is a consortium of countries owning De Beers, having uncertainty around elections and if change of governments could affect the running of the country or existing agreements. An example of regulatory risks is how the US imposed tariffs on Botswana and India for imports and how those kinds of dynamics could affect future sales.
4. Financial & Macroeconomic Considerations
Of course one big element of consideration in any potential transaction is, can you actually afford it? Can Botswana afford an investment of P55 billion. It may be useful to put this into factual context. a. Botswana’s GDP as at the end of 2024 was P260 billion meaning the acquisition would be equivalent of 24% our GDP. b. Botswana’s total budget for 2025/6 is BWP97 billion meaning the transaction would be above 50% of the total annual spending of government. c. Considering that the transaction would likely be financed with debt, that would grow the country’s debt from BWP74 billion (25.4% of GDP) to BWP129 billion (46% of GDP). This would break the current upper limit for public debt which is 40% of GDP. This would trigger that the Minister of Finance go to parliament to seek to raise the limit (possibly to 60%). This would allow the general public to get a glimpse into the details of the deal as I’m assuming to raise the limit, parliament would want a motivation for doing the deal. d. An additional complication for raising the debt limit is that NDP12 is very ambitious on development spending with an expected P70+ billion a year for projects for the next 5 years. Considering that in most years the development budget is normally between P20-40 billion, and with no clear idea on how revenues will be increased to finance the above, it is only reasonable to believe that the country would be expected to finance upwards of P200 billion utilising debt (there is reference to PPPs being used for these projects but the government has been throwing around that term for close to 15 years now and no real progress has been made in that regard. Also for most of these to work they would also have to get government guarantees which would increase the debt figure on the government’s books). The challenge here is that even if the De Beers debt funding is off balance sheet, it would also be competing with other priorities the government has which require debt funding. This would imply the debt ceiling and our respective fiscal situation could deteriorate very quickly beyond the 60% debt ceiling we would require to do everything. This would have significant impact on the country’s sovereign credit ratings and overall financial situation. e. It should be noted though, that my expectation is that the deal would be self financing based on dividends. This means that the resultant P9 billion for servicing the loan would NOT be coming out of the annual budget therefore if structured and valued correctly, it shouldn’t have an impact on the actual government budget i.e. this interest payment would not be tacked onto the recurrent government budget so it shouldn’t affect other government spending. That said, because it government would be expected to guarantee the deal (which is another added complication because Ministry of Finance refuses to do guarantees where possible), the deal still has to be accounted for in the government’s debt considerations.
Once we have determined that we can actually afford it based on the above facts, we then have to assess whether it is in fact a good deal itself. With the creation of a sovereign wealth fund (and just normal investment management), the investment manager has a finite set of resources and they have to choose the best deals i.e. deals have to compete with each other for resources. The deal would have to be subjected to certain analysis which include the below: a. Determining the Internal Rate of Return (IRR): this is a measure which looks at how profitable a particular deal will be by factoring expected cashflows with a desired rate of return/ cost of capital. In normal investment portfolios, the investing entity would normally have a benchmark of how much return it will get for a deal for it to qualify for investment. If the investment is higher than the hurdle rate required, it then has to compete against other potential investments and prove to be the best option for the country. The analyst would have to factor all the industry forecasts we have discussed, the expected growth and performance of the company as determined by forecasts, look at how much it’ll cost to finance the deal and whether it proves to be a better deal than other deals and then only determine if it is worth the investment. b. Payback periods: utilizing similar factors as IRR, the payback period would tell you how quickly your deal would break even. This would imply a deal with a shorter payback period is more desirable meaning you would ideally want a company which will generate lots of cash and profits upfront rather than further down the line. c. Scenario and sensitivity analysis: all of the above analysis would have to be subjected to different scenarios since they are based on assumptions. The investment analyst would have to test the performance forecasts of the company under pessimistic, normal/base and optimistic assumptions. This means one would have to analyze what would the final decision be if diamond prices went up, down or stayed the same, what if synthetics market share increased, decreased or stayed the same, what if De Beers market share increased, decreased or stayed the same etc. The investment analyst would create many different scenarios to see how the final decision is affected by different scenarios and factors in order to determine the largest risk factors and to also see how strong the investment is. For example, if the analysis determines that De Beers will remain profitable and strong even when overall natural diamonds prices and market share fall, then one would have some comfort that the investment will remain a good one even under challenging circumstances. Conversely, if it is determined that absolutely every factor has to go excellently for the investment to be barely profitable, then the investor would shy away from it because the risk is too high.
In conclusion, whether Botswana wants to increase its stake in De Beers cannot be a purely emotional decision. It must be subjected to a lot of analysis by an investment analyst who would likely prepare a 200-300 page motivation for the deal one way or the other. You have to factor how the industry is expected to do, how the company will do in respect to the industry, how you will finance it, what strategic value adds the deal will bring, what risks exist in the space, how to structure it, how to run it and control it, whether you can afford it and whether there aren’t any better uses of your investment money.
A deal like this would be a considerable risk to the country because of its sheer size relative to our GDP, but it would also create excellent opportunities to try and control our destiny.
Depending on how its structured and how much control we would have, it could possibly increase Botswana’s margins and revenues and allow for us to control strategic decisions like where the offices sit and how we operate downstream. The question will always be: will we be able to pull it off and how costly would it be if we can’t.
*Mphoeng Mphoeng is a director at a corporate finance, economics and investment consultancy, MP Consultants. He has previously worked at University of Botswana, BIFM, Standard Chartered and Bank of Botswana